Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

CFPB - Another U.S. Government Agency Running Wild

Politics / Government Intervention Nov 17, 2015 - 03:12 PM GMT

By: Rodney_Johnson

Politics Everybody likes to get money back from the government. Now there’s a new way to cash in on Uncle Sam.

But like many government programs, this one has a few issues.

If you bought a car in the last few years, you might get a check from the Consumer Finance Protection Bureau(CFPB), as long as you live in the right (or I guess, the wrong) neighborhood and have a certain-sounding last name.


That’s because the watchdog agency started sniffing around the auto industry a couple of years ago and dug up a bone. It might be a synthetic bone that you can see only with x-ray eyes, but hey, they’re the government.

The board demanded that a lending institution, Ally Bank, atone for its theoretical sins – which I’ll detail in a moment – by paying millions of dollars without admitting guilt. Now it’s got to find some victims.

It’s the latest example of a government agency that’s broken free of its leash.

When buying a car, there’s money to be made or lost at each step, depending on whether you are the buyer or seller.

Beyond simply negotiating the cost of the vehicle, buyers must navigate the dealer add-ons, prep charges, and extended warranties.

After all of that is done, buyers have to contend with one more important variable – financing. Dealers take credit applications from borrowers, feed them into their systems, and then get financing offers from lending institutions, which dealers can mark up for more profit.

The CFPB found an ethereal offense in this corner of finance.

The agency sifted through mountains of data and determined that Ally Bank charged different people different rates of interest. Buyers with lower credit scores, smaller down payments, or less income were charged more.

The CFPB knows this for a fact, since the agency reviewed credit applications containing such data. But that’s not the problem.

The CFPB is certain it spotted something else. Racism. The agency socked Ally Bank with an $80 million penalty for the alleged offense.

Unfortunately, they hit a snag. None of the applications identified the borrower’s race.

There’s a good reason for this. It’s illegal for the lenders to collect the race of applicants because that attribute, either consciously or unconsciously, might affect a lending decision.

Ally Bank had no way of knowing any applicant’s race. But such a trivial problem wasn’t about to stop the CFPB.

The agency enlisted the help of some math geeks, who used Bayesian Improved Surname Geocoding (BISG), to guess the consumers’ race.

The model cross-referenced more than 150,000 last names from the 2000 census to determine the likelihood that a last name belongs to a minority.

Then, using the racial composition of neighborhoods based on the 2010 census, the BISG determined if borrowers lived in predominantly minority locations.

By cross-referencing the results, the CFPB developed a guesstimate of which borrowers are most likely minorities. Of course, the CFPB doesn’t know anyone’s race, because no one ever asked. Again, it’s a trivial concern, but it does bring up another problem.

The BISG results aren’t one-size-fits-all. According to the model, some consumers are all but certain to be minorities, while others simply have a better than 50% chance.

The CFPB doesn’t want to send out checks to undeserving people – the ones that aren’t minorities – so it came up with a novel approach.

If the algorithm is 95% certain a borrower is a minority, the CFPB sends a letter explaining the situation – you were probably overcharged and will soon receive a check. The CFPB does ask the consumer to write back if they’re not a minority.

If the algorithm is only between 50% and 95% confident a borrower is a minority, a different letter is sent. This one asks the consumer to write back confirming they are indeed a minority so they can qualify for a check.

All of this brings up a couple of questions.

If the CFPB has to use a complicated algorithm to determine a person’s race, what methodology do they think Ally Bank used?

It’s a bank, after all, not a car dealership. The lender wasn’t sitting in front of the borrowers. They simply received an electronic credit application. If the charge is that the dealership finance officers and not the banks used race when offering finance terms, then why not go after them instead? There could be real issues here, it’s just difficult to see how they reside at the bank.

And if a certain finance charge is excessive, then why is it only excessive for some of the borrowers who paid those rates and not others? If the CFPB identifies certain rates as predatory, don’t all consumers deserve their “protection,” no matter what their race?

I’m no fan of Ally Bank. It’s the old finance arm of GMAC, which got involved in subprime loans and required a taxpayer bailout.

But that doesn’t make extorting money from the lender based on an algorithm acceptable.

There might be areas where the CFPB has done some good, saving consumers from harm or stopping abusive practices, but I haven’t seen one.

So far, it looks like one more agency that’s determined to provide solutions, and then go looking for a problem.

Rodney

Follow me on Twitter ;@RJHSDent

By Rodney Johnson, Senior Editor of Economy & Markets

http://economyandmarkets.com

Copyright © 2015 Rodney Johnson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Rodney Johnson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in