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CFPB admits using bad math to restructure $900B auto finance industry: editorial

October 9, 2015
Investor’s Business Daily, which tracks the latest financial and business news to help investors make more money in the stock market, published the following editorial on Oct. 1:
Shakedown: After accusing the ninth-largest bank auto lender of discriminating against minorities, the president’s consumer watchdog admits his analysis is less than perfect.
Still, according to a federal order on Sept. 28, Cincinnati-based Fifth Third Bank will have to make $18 million in restitution for allegedly marking up loans for blacks and Latinos.
It will also have to cap the interest rates it charges customers, which Consumer Financial Protection Bureau chief Richard Cordray called "a significant step toward protecting consumers from discrimination."
Yet on Sept. 29, as the ink was still drying on the settlement, Cordray confessed under grilling by House
banking panel chief Jeb Hensarling that the disparate impact methodology that his agency uses to determine lending bias "overestimates" racial disparities in loan pricing.
Hensarling presented Cordray with leaked internal agency memos showing agency officials have expressed reservations about their own math used to justify cracking down on the auto finance industry — for discrimination that, it turns out, even they aren’t sure exists.
"We’re trying to get it right. We’re trying to understand what accurate means," Cordray said in stunning testimony ignored by the mainstream media.
Hensarling then asked, "Do you control for credit scores" to see if they explain racial disparities?"
"I’m not the biggest expert on this at the bureau," Cordray replied, but "I don’t think it’s fair to say credit scores can explain the disparities."
What he meant to say is they’re not even checking. The complaint against Fifth Third states that investigators "did not make additional adjustments for creditworthiness or other objective criteria related to borrower risk." Yet it concludes: "These disparities are based on race and not based on creditworthiness or other objective criteria related to borrower risk."
"We’re trying to get it right," Cordray said. Trying? Doesn’t he owe it to defendants to get it right before he accuses them of something as serious as racism?
His confession would seem to discredit the earlier discrimination cases against Ally Bank and Honda, as well, which were based on the same discredited methodology. Yet he’s aggressively pursuing other major auto lenders as we speak, with the ultimate goal, as revealed in those internal memos, of eliminating discretionary financing in auto loans.
In short, Cordray is trying to restructure the $900 billion auto finance industry based on bad math.
Even Democrats see this is wrong. Many have crossed the aisle to vote for bills to reform the CFPB and rein in its rogue director. One of them would create a commission to check Cordray’s power, and another would appoint an inspector general to audit the cases that his race cops are making vs. lenders. Both bills were approved in late September with bipartisan support.
Seeing the heat turned up, the White House is circling the wagons, claiming Republicans are trying to "tie the CFPB in knots" and "gut consumer protections."
Of course, it’s Cordray and his out-of-control agency that are hurting consumers. With their meritless discrimination cases, they are jacking up the cost of auto loans for average Americans, including minorities with good credit.