Commentary: New Study Discredits CFPB’s Fair Credit Testing Method

By Forrest McConnell / NADA chairman

Dec. 2, 2014

A new comprehensive study of more than 8.2 million auto loan contracts by the consulting firm Charles River Associates concluded that the proxy method used by the Consumer Financial Protection Bureau to measure for unintended discrimination in an auto lender's portfolio is "conceptually flawed" and "inherently unreliable."

The peer-review study, Fair Lending: Implications for the Indirect Auto Finance Market, commissioned by the American Financial Services Association and released on November 19, found significant bias and high error rates.

The CFPB, which issued its guidance in March 2013, has used a proxy method to support claims of unintended discrimination against-and extract settlements from-auto lenders and to pressure auto lenders to change the way they compensate dealers for originating finance contracts.

The study found that the CFPB's methodology frequently misidentified the background of consumers and dramatically overestimated differences in dealer reserve paid by different groups of consumers. For example, the CFPB's method overestimates African-American borrowers by 41 percent.

The study also concluded that the CFPB's examination of differences in dealer reserve at the portfolio level is meaningless because it fails to account for legitimate reasons for pricing differences at the retail level.

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 released its comprehensive Fair Credit Compliance Policy & Program in January 2014.

When implemented, NADA's program documents instances when dealers discount interest rates and ensures the discounts are for legitimate business reasons, like meeting a competing 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.

Meanwhile, the CFPB has repeatedly failed to fully respond to questions from Congressional Democrats and Republicans urging disclosure of its testing methodology, which is lacking in the bureau's guidance.

Based on this and other flaws in the guidance, 146 members of Congress-which includes 90 Republicans and 56 Democrats-have cosponsored legislation in the U.S. House of Representatives to rescind the CFPB's 2013 guidance.

The bill, H.R. 5403, co-sponsored by Reps. Marlin Stutzman (R-Ind.) and Ed Perlmutter (D-Colo.), also requires transparency and public input prior to the issuance of future CFPB guidance on auto lending. For more information, visit www.nada.org/cfpb.

Moving forward, the federal government should consider promoting broad industry adoption of NADA's fair credit program, which addresses fair credit risks at the retail level while preserving competition in the marketplace.

McConnell is a Honda/Acura dealer in Montgomery, Ala. NADA represents more than 16,000 new-car and -truck dealerships with about 32,000 domestic and international franchises.