Through findings applauded by the National Automobile Dealers Association, the American Financial Services Association offered its latest rebuttal this morning to contentions by the Consumer Financial Protection Bureau about problems with the indirect auto financing process.
A comprehensive study commissioned by AFSA of more than 8.2 million auto financing contracts found that the disparity alleged by the CFPB between the amount of dealer reserve charged to minorities and non-minorities is not supported by data.
The study titled, “Fair Lending: Implications for the Indirect Auto Finance Market,” examined the proxy methodology used by the CFPB and found significant bias and high error rates.
“AFSA is committed to ensuring all consumers are treated fairly. AFSA’s results are much lower than what the CFPB alleges as problematic in the marketplace, because the association’s study factored in complexities of the automotive market that the CFPB did not consider, and errors associated with the CFPB methodology,” AFSA president and chief executive officer Chris Stinebert said.
“The interplay between factors such as geography, new versus used, length of loan, down payment, trade-in vehicle, credit score and competitive factors, such as meeting or beating a competing offer, is evidence of a dynamic market,” Stinebert continued.
AFSA explained that central to the study was an examination of the Bayesian Improved Surname Geocoding (BISG) proxy methodology used by the CFPB to determine disparate impact to legally protected groups.
Officials pointed out that BISG estimates race and ethnicity based on an applicant’s name and census data. AFSA’s study calculated BISG probabilities against a test population of mortgage data, where race and ethnicity are known.
Among the findings:
• When the proxy uses an 80 percent probability that a person belongs to an African-American group, the proxy correctly identified their race less than 25 percent of the time.
• Applying BISG on a continuous method overestimates the disparities and the amount of alleged harm and provides no ability to identify which contracts are associated with the allegedly harmed consumers.
“Alleged pricing discrepancies between minorities and non-minorities for auto financing rates are simply not supported by data,” Stinebert said.
“We have reviewed our study results with the CFPB and look forward to continuing our work with the bureau to address the issues we raised and to ensure consumers have access to affordable credit,” he went on to say.
Conducted by consultants at Charles River Associates, the study examined 30 percent of all new and 10 percent of all used retail installment contracts financed during 2012 and 2013.
“This study shows that the CFPB’s attempt to upend the auto lending process is insufficiently informed and the victim of flawed assumptions and inadequate peer review,” said Peter Welch, president of the National Automobile Dealers Association.
“Allegations of potential discrimination are explosive and certainly should not be made without a reliable foundation in data,” Welch continued.
The NADA president pointed out that currently 136 members of Congress from both parties — 86 Republicans and 50 Democrats — have cosponsored legislation in the U.S. House of Representatives to rescind the CFPB’s 2013 guidance that serves as the centerpiece of the bureau’s attempt to change the highly efficient and pro-competitive dealer-assisted financing model.
The bill, H.R. 5403, co-sponsored by Reps. Marlin Stutzman (R-Ind.) and Ed Perlmutter (D-Colo.), would also require transparency and public input prior to the issuance of future CFPB guidance in auto financing.
Welch noted that the legislation came after dozens of letters — from Congressional Democrats and Republicans to the CFPB — urged the disclosure of the CFPB’s testing methodology, which is lacking in the bureau’s guidance. The CFPB repeatedly failed to fully respond to the questions it was asked, leading to the Stutzman-Perlmutter legislation.
NADA added that dealers have also offered up an optional program that addresses fair credit risks.
Based on a fair credit risk mitigation model developed by the U.S. Department of Justice in 2007 to resolve fair credit investigations of two dealers, NADA in January released its comprehensive Fair Credit Compliance Policy & Program. When implemented, the NADA program documents those instances when dealers discount interest rates and ensures the discounts are for legitimate business reasons, like meeting a competitive finance offer.
Rather than require costly and inaccurate statistical testing, the program controls for risk on the front end of the transaction. Many dealers, including several large dealer groups, have implemented the program.
NADA has called on the CFPB to urge finance companies to incorporate the program into their compliance management system.
“Had the CFPB followed the process set forth in the legislation before it issued its guidance to indirect auto lenders, it could have avoided the flawed assumptions and lack of clarity that have come to characterize this guidance,” Welch said.
“The way forward is for the government to promote broad industry adoption of NADA’s fair credit program, which would address fair credit risks where they matter — at the retail level,” he went on to say.