Auto Finance Coalition to CFPB: Address Proxy Methodology ‘Errors’

MegaphoneA coalition representing more than 50 of the nation’s top auto finance sources has sent a letter to the Consumer Financial Protection Bureau requesting that it publicly address the “bias and error” found in its method for determining whether an indirect auto lender’s portfolio contains evidence disparate impact, according to the American Financial Services Association.

The coalition, which includes AFSA, the American Bankers Association, Consumer Bankers Association, Financial Services Roundtable, and U.S. Chamber of Commerce, is asking the CFPB to review a study conducted by Charles River Associates which “analyzed the complexities of the indirect finance market and evaluated current regulatory fair lending practices, with special attention to the methodology used by the Bureau,” and respond publicly to the findings.

“CRA found the Bureau’s application of the Bayesian Improved Surname Geocoding (BISG) proxy methodology creates significant measurement error, which results in overestimations of minorities in the population by as much as 41%,” the coalition wrote in the letter. “In its own white paper on the method it uses to proxy for race – published prior to the CRA study – the CFPB acknowledged the overestimation (which it found to be 21%), but never indicated how, if at all, it has corrected for this discrepancy.”

The study concluded that the Bureau’s present application of BISG methodology may create the appearance of “differential pricing on a prohibited basis when none exists,” which leaves the industry without a way to ensure compliance and could impose unfair liability based on the flawed methodology.

The coalition is requesting that the CFPB issue a public response on the findings of the study before pursuing further “dealer mark-up discrimination claims through supervisory or enforcement action,” as well as address the following specific points:

  1. Portfolio level analysis of aggregated contracts sourced from dealers with different operating models, cost structures, pricing policies, locations, and competitive landscapes. These factors, along with the seasonality of auto sales and financing, are major factors that must be corrected in an analysis at the portfolio level.
  2. Implementation of economic controls to adjust for legitimate business factors such as new, used, trade-in, options, insurance, and warranties. Failure to consider business factors for observed disparities increases the potential of reaching erroneous conclusions.
  3. The Bureau must address and adjust for the bias within the BISG methodology and its overestimation of individuals within protected classes.

The study, entitled Fair Lending: Implications for the Indirect Auto Finance Market, was commissioned by AFSA and published on Nov. 19, 2014.

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