CFPB to Review AFSA Challenge to Disparate Impact Methodology

CFPB is taking a close look at AFSA’s homework.

A spokesman from the Consumer Financial Protection Bureau said in a statement that the consumer regulatory agency will carefully review findings in a long-anticipated study commissioned by the American Financial Services Association that looks closely at the proxy methodology the regulator uses to access disparate impact in auto financing.

The study, titled Fair Lending: Implications for the Indirect Auto Finance Market, was conducted by consultants at Charles River Associates. With over 130 pages of data and text, the study’s authors, Arthur P. Baines and Dr. Marsha J. Courchane, say they examined 30% of all new and 10% of all used retail installment auto contracts financed during 2012 and 2013. Central to the study was an examination of the Bayesian Improved Surname Geocoding, or BSIG proxy methodology.

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. The study concludes that the disparity alleged by CFPB between the amount of dealer reserve charged to minorities and non-minorities is not supported by data.

AFSA wrote that the proxy correctly identified the race of African American less than 25% of the time, not 80%, as BISG is supposed to do.

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, according to the study’s findings. “Alleged pricing discrepancies between minorities and non-minorities for auto financing rates are simply not supported by data,” AFSA President & CEO Chris Stinebert said in the AFSA release.

Stinebert said AFSA had reviewed its results with the CFPB and looks forward to continuing its work with the bureau to address the issues the group raised in its report and to ensure consumers have access to affordable credit.

Reaction to the report was swift.

Ally Financial Inc., which last December was ordered by CFPB and the United States Department of Justice to pay $80 million in damages to harmed African-American, Hispanic, and Asian and Pacific Islander borrowers and $18 million in penalties, said it appreciated AFSA’s data-driven approach in the study.

“The report further supports our previously stated concerns with the BISG proxy methodology and the portfolio level analysis that it drives. As demonstrated in the AFSA study, there are clear limitations in using the BISG proxy methodology to assess disparate impact in auto financing,” Ally Financial said in an email statement.

The lender said it believes that the most prudent course is for finance providers, dealers and other participants to come together to determine an industry-wide solution that addresses the issue of disparate impact without triggering significant unintended consequences.

Meanwhile, the National Automobile Dealers Association said, “The study has given momentum to efforts on the Hill to rescind the CFPB’s guidance on auto lending. Legislation introduced by Reps. Marlin Stutzman (R-Indiana) and Ed Perlmutter (D-Colorado) currently has 137 co-sponsors – including 51 Democrats and 86 Republicans.”

“In fact, Rep. Debbie Wasserman Schultz (D-California) – who also chairs the Democratic National Committee – just announced her support for the bill,” said Jonathon Collegio, vice president public affairs at NADA in an email statement.

A CFPB spokesman reiterated that the regulatory agency “is always interested in relevant data regarding important issues like discrimination in auto lending.”