Patrick McHenryChairman

Washington, January 20, 2016 -

WASHINGTON -- The Consumer Financial Protection Bureau is distributing $80 million in settlement proceeds from its enforcement action against Ally Financial and its subsidiary Ally Bank without verifying that recipients are eligible to receive the money.  The result is some white borrowers are getting settlement checks over alleged racial discrimination against African-Americans, Hispanics and Asians.

That’s what the CFPB concedes in its own internal analysis obtained by the House Financial Services Committee.  The Committee released internal Bureau documents today as part of a staff report that also reveals the Department of Justice originally objected to the CFPB’s approach but later acquiesced, evidently in the face of “push back at senior levels” from Bureau officials, as one document states.

It is unclear whether CFPB Director Richard Cordray personally approved this action or whether the decision was made by Patrice Ficklin, the Bureau’s Assistant Director for Fair Lending and Equal Opportunity.

“Sending remuneration checks to white borrowers as a means of remedying alleged discrimination against African-American, Hispanic, and Asian borrowers is an unorthodox approach to fair lending enforcement, to say the least,” the staff report notes. 

 ‘FRAUD ON A MASSIVE SCALE’

The CFPB’s action “invites fraud on a massive scale,” said Committee Chairman Jeb Hensarling (R-TX), whoasked Attorney General Loretta Lynch to immediately suspend distribution of the settlement proceeds “until such time as you have certified that all claimants have verified their eligibility in writing under penalty of perjury.”

“It defies logic for federal agencies to distribute settlement funds without first verifying the eligibility of prospective recipients, particularly when the Bureau’s case is premised upon a flawed statistical analysis,” Chairman Hensarling wrote in letter to Attorney General Lynch today.

To find minority borrowers, the CFPB essentially makes educated guesses using an algorithm that assigns probabilities to whether borrowers are minorities based on their last names and where they live.

The Department of Justice originally proposed to the CFPB a distribution method that “[p]rovides strong protection from criticism that we are giving damages to non-Hispanic white borrowers,” according to a Bureau PowerPoint presentation.  In the same presentation, however, Bureau officials note that “if we adopt DOJ’s proposed limitation” then potentially only 36,000-143,000 consumers would receive checks – far fewer than the 235,000 consumers CFPB Director Cordray had publicly alleged were harmed by Ally.

Adopting the Department of Justice’s plan would therefore expose Director Cordray’s estimate “as wildly inflated” and the Bureau’s disparate impact methodology as “deeply flawed,” the staff report states.  “In fact, Director Cordray did not know how many alleged victims there were in the Ally case because the Bureau could not identify the race of any consumer whose finance contract had been purchased by Ally.”

The report also discloses the government mailed 419,669 letters to potential claimants in an attempt to find the 235,000 minority borrowers Director Cordray claimed were victimized.  Indeed, a Bureau official informed the Committee the CFPB mailings ultimately generated 235,319 Ally accounts eligible to receive checks.  

SAFEGUARDS REMOVED TO ENGINEER DESIRED RESULT

“Political exigency required the Bureau to design a process that would ensure that a sufficient number of alleged victims would be identified as eligible claimants; after all, if fewer claimants received checks than Director Cordray initially announced, the validity of the Bureau’s disparate impact methodology would be called into question.  But, as internal documents reveal, Bureau officials knew that in order to generate a sufficient number of check recipients, they would have to remove a number of safeguards from the claims process, including confirming the race of claimants alleged to have been discriminated against, thus making it more likely that non-minority consumers would receive remuneration.

“Confronted with such a dilemma, the Bureau chose to save face by engineering its desired result rather than implementing a claims process reasonably designed to identify alleged victims and discourage fraud,” the report concludes.

SECOND REPORT

The staff report is the second released by the Committee on the CFPB’s enforcement actions against vehicle finance companies.  The first report, released in November, revealed the Bureau pursued – and Director Cordray approved – its potentially “market-tipping” enforcement action against Ally even though internal Bureau documents revealed the statistical method upon which its case rested is “prone to significant error.”  The CFPB was able to secure its settlement with Ally because of “undue leverage”– the company needed Washington regulators’ approval for a broader restructuring of its business.

Assistant Director Ficklin will be called to testify before the Financial Services Subcommittee on Oversight and Investigation in early February at a hearing on the CFPB’s auto-lending supervision, enforcement and rulemaking.