Inside Financial Services

Ally’s Non-Discrimination Discrimination

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Commenter Stays72, reacting to my denunciation yesterday of the Consumer Finance Protection Bureau’s strong-arming of Ally Financial over its purported discriminatory auto-lending practices, writes this:

Tom left out this inconvenient fact of the case: Ally Financial allowed auto dealers, who meet face to face with the customer, to increase the interest rate charged to the customer, and then were allowed to keep a share of the markup. African Americans, Latinos and Asians were charged a higher interest rate at a much greater frequency than other (white) customers. Ally Financial didn’t have to know the ethnicity of the customer—they relied on the auto dealers to do that, and Ally gained financially from that arrangement.

Funny how Tom leaves out the key points that don’t support his premise. Funny, but not surprising, since this is a consistent pattern for him.

Nice cheap shot there at the end! As to the larger point, dealer markups on indirect auto loans are a common, accepted, and longstanding industry practice, and were even authorized in the CFPB’s agreements with Ally, Honda, Toyota, and other lenders. Such markups would indeed be objectionable if dealers used them as a way to discriminate against minority borrowers. But the whole reason why the CFPB-Ally deal is such a travesty is that there’s no evidence that Ally or dealers discriminated against anybody. The beginning and end of the CFPB’s case against Ally, remember, is that it relied on disparate impact of loan terms on minority borrowers: minority borrowers were generally turned down more often and charged higher rates than whites were. But as I noted yesterday, if you look beyond mere disparate impact and adjust the data for relevant factors such as credit score and loan size and term, any evidence of discrimination evaporates. Even the government seemed to understand that, if former Ally CEO Michael Carpenter is to be believed. But the government didn’t care. It wanted to score political points and make an example of Ally for the rest of the industry.

But the actual facts can’t change. Stays72 imagines some dark secret conspiracy between Ally and its dealers when he writes that “Ally Financial didn’t have to know the ethnicity of the customer—they relied on the auto dealers to do that.” I suppose he’s right, in a way. Ally and its dealers did collude—to ensure its customers were treated fairly and equally. That the company had to cough up $100 million for doing the right thing is shameful.

What do you think? Let me know!

11 Responses to “Ally’s Non-Discrimination Discrimination”

  1. Avatar paul

    The CFPB is dangerous. you have people that may not understand what they are doing, legislating their political beliefs and what they, in their biased minds, believe is best for other people. There was an article on “Payments” today, saying that in a congressional hearing on payday lending, the CFPB person testifying had never been to a Payday store. I heard a CFPB person say at a conference that “he knows” that “payment lending” is a bad practice. It is, in his mind, not a good practice for a borrower to understand what payment they are comfortable with ???? It is a bit scary. I would imagine that CFPB person never talked to someone getting a used car loan. Hopefully, the CFPB, as judge, jury and executioner will cease to exist after the November elections.

  2. Avatar Anonymous

    Disparate impact cases coming forward without actual real live people showing they were discriminated against should be outlawed. As soon as one drops down in to the specifics e.g. this person with this credit score and this history and this term and this that or the other thing and got this interest rate – which is not just different but also unhinged from the specifics – the disparate impact erodes quickly. And results in “Oh we did not mean him. or “Oh we did not mean her.” “We meant the editorially ‘they’ as in they were wronged. If they were bring them out of the shadows.

    • Avatar Dennis

      Sorry. Anonymous above was really Dennis. Hit the send too soon.

  3. Avatar jsc173

    The “new normal” is, regardless of any rational measure of creditworthiness — credit score, prior credit experience, debt-to-income ratios, tenor of employment, etc. — results are what’s most important. E.g., if your credit granting process rejects more minorities, then your process is discriminatory.

    Yes, many dealers have a checkered history of markups that can be labeled discriminatory but that isn’t the point here.

    Regulators have been moving towards the “new normal” but still don’t know how to describe what one would have to do to achieve equal results among all racial or ethnic groups. Broad-based analysis of credit bureau data shows that some minority groups do have lower average credit scores and poorer credit histories. A cold fact that seems not to be relevant.

    Knowing bank scoring systems upside down and backwards, the only way I know to achieve what they want would be to adjust scorecards BASED ON RACE OR ETHNICITY.

    In other words, the lending equivalent of affirmative action.

    Last time I checked the way current regs are written, that would be highly illegal since those factors cannot be used in the underwriting process.

    Ally isn’t the only one who’d been harassed on this issue. At prior banks, I’ve had to contend with regulators complaining that the process resulted in a higher level of rejection of minorities, so it must have been discriminatory. Every time I’ve heard that complaint I’ve invited the regulator to have someone, anyone tell me how to address this issue, yet still not “know” the race or ethnicity of the borrower. Of course, they’ve done a significant level of loan review and have never identified a single case where they disagreed with the reject of a minority applicant.

    That’s why we are now see everyone twist their underwriting guidelines into “pretzels” to accommodate those with lower scores, or little to no credit or employment history.

    Yet, this past financial debacle has seen a result whereby all the many efforts to make credit available to everyone resulted in a disproportionate number of minorities whose home were foreclosed or cars repossessed.

    So we want to see a repeat of that?

  4. Avatar SWPilgrim

    New framework seems to create a sweetspot somewhere betwren too-big- to-fail and too dumb- to succeed. Why not accelerate the cycle and hire them all now as opposed to waiting for retirement?

  5. Avatar Morgan's Mom

    Seems the CFPB is trying to justify their existence at the expense of others, whether true or not. What a poor excuse for a protection agency. Makes me ill. I’m so very tired of the racist connotation so prevalent in our society.

  6. Avatar stays72

    Thanks for highlighting my comments. What you still haven’t explained is why African Americans paid 29 basis points, Latinos paid 22 basis points and Asians paid 20 basis points higher in interest rates than white borrowers through Ally Financial. Apparently, Ally Financial couldn’t explain it either, or they wouldn’t have agreed to an $89 million dollar fine. If I was Ally and I had a perfectly logical and defensible explanation for why minority borrowers paid more for an auto loan, I would have submitted it and defended it. But since Ally couldn’t provide an explanation and was forced to pay a fine, perhaps you can explain the pricing disparity between the various racial groups. Why did African Americans pay 29 basis points more than white borrowers? Please defend your answer with facts specific to this case.

    • Avatar coolcat

      But as I noted yesterday, if you look beyond mere disparate impact and adjust the data for relevant factors such as credit score and loan size and term, any evidence of discrimination evaporates.
      ———————————
      FICO scores are racist………or something.

    • Avatar Anonymous

      Since the only people who have access to the data in this specific case are the lender and the CFPB, I don’t think anyone can meet your standard of providing “specifics” from this case. At this point, just as you assume that if the company had a strong defense they would use it, I’ll assume that if the CFPB had data that showed the ex-CEO was lying right now, that they would share it.

      Look, maybe there is real discrimination going on, and if there is, let’s address it in a real way!. In fact, if the CFPB could show, in a court of law, that Ally was really engaged in widespread discrimnitation, the I would sure as hell hope that lawsuits would be filed, criminal charges occurring, and people would be going to jail. I’m guessing they can’t, and that is why we aren’t seeing any further action beyond this stupid fine where the money cant even go the “victims.”

  7. Avatar etoleary

    The CFPB seems to start with a conclusion and then go in search of a premise. That’s manifestly unfair to the lenders who have to defend themselves from inherently unprovable allegations.

  8. Avatar coolcat

    Look at the problem of protests outside of banks using the flawed Boston Fed Study. Is it any wonder why Ally would just pay the fine and move on?

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