Joseph: The CFPB just another bloated bureaucracy
Immediately after the November election, Senate Majority Leader Mitch McConnell and House Speaker John Boehner laid out an ambitious agenda for the 114th Congress. Media attention on big ticket items like approving construction of the Keystone XL pipeline and reforming the tax code left one of the Republican leaders’ important promises out of the spotlight: meaningful Congressional oversight of federal agencies.
One agency that especially should not escape a watchful eye is the Consumer Financial Protection Bureau (CFPB), which was created in 2010 as part of the contentious Dodd-Frank Act.
Like so many other well-intentioned bureaucracies, CFPB quickly fell victim to “mission creep.” Even though the legislation that created the CFPB explicitly exempted auto dealers from its oversight, it has found a backdoor way to regulate dealerships by going after the companies that provide wholesale financial services.
The bureau recently alleged one such company was guilty of racial discrimination in auto loans based on an analytical method of lender data. But because dealers are prohibited from recording race or ethnicity, CFPB relied on a “proxy” methodology to guess this information based on the name and address of the car buyer.
The CFPB compelled the company in question, Ally Financial, to pay nearly $100 million to settle claims of discrimination resulting from the proxy analysis.
A study of the CFPB’s proxy methodology commissioned by the American Financial Services Association examined 8.2 million auto financing contracts and compared them with self-reported census race data “found significant bias and high error rates” and concluded that CFPB’s charge of racial discrimination is not supported by data.
One doesn’t have to look far for the CFPB’s motivation to apply faulty statistical models in an attempt to find discrimination. As the adage goes, follow the money. The CFPB keeps the money from penalties that it extracts via enforcement actions — a blatant conflict of interest.
The rest of the CFPB’s funding comes from the Federal Reserve Board’s annual funds. This means that in addition to the CFPB’s incentive to wring every dollar it can from private businesses, the rest of its funding comes from appointed bureaucrats who are unaccountable to Congress.
The financial industry, Congress and the public all have an interest in strong consumer protections and stamping out racial discrimination in lending where it actually exists. But no government agency should be allowed to shakedown companies to settle discrimination claims that arise from flawed methodology.
Jeffrey H. Joseph is a business professor at the George Washington University School of Business.