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Finding Racism Where It Isn’t, WSJ December 12, 2014

The federal government turns its ‘disparate impact’ hunt on the auto-loan market.  

gauge broad differences in outcomes by ethnic group and gender, where it only has to be a little better than classifying people randomly to produce statistically useful results. Even so, a recent study in the journal Health Services Research found BISG most reliable for the over-65 cohort, “possibly suggesting that older individuals may live in less diverse communities and carry last names that are more suggestive of their race/ethnicity.”

The CFPB itself admits its method overstates African-Americans in the car-buying population by 20%; a private study by Charles River Associates for an auto-finance trade group finds the overstatement closer to 40%. Yet this broken, gap-toothed rake supposedly is a fine enough comb to discover ethnic disparities of between 10 and 30 basis points on an auto loan, or a maximum of 0.3 percentage points.

Understand: Current car-loan rates range from 2.6% for prime borrowers to 12.7% for bottom-tier subprime. We’re talking about disparities that amount to less than 1% of total transaction cost when price, loan terms and options are considered.

Any peer review panel would surely recognize the CFPB’s strong bureaucratic and political incentives to find the desired discrimination, but the agency’s methods will never be subjected to peer review. Then again, maybe it doesn’t matter since its malpractice is so openly flaunted.

For instance, the agency reserves the right to act against “portfolio-level” discrimination, in which actual bias is a logical impossibility. No discrimination is evident at the dealer level, and can’t exist at the lender level since the lender can’t see the race of the borrower. Discrimination is charged based solely on disparities that arise because dealers have different business models.

Example: A small-volume urban dealer selling mostly low-end cars may rely disproportionately on credit terms to make transactions profitable. Such practices are completely normal since dealer markups on entry-level compacts like a Honda Fit or Ford Fiesta are so notoriously low that they don’t cover the dealer’s overhead and salesperson’s commission.

Yet combine this dealer in the same portfolio with a dealer who sells top-end pickups to suburban buyers, and overall the loan portfolio exhibits a disparity regulators are happily able to correlate with race.

The government obviously has a Stalinist peeve against bargaining, since it leads to different outcomes for different people. But even in the unlikely event that the CFPB succeeds in forcing the highly competitive wholesale auto-lending business to disallow dealer markups, bargaining will simply focus on the price of the car and options, changing nothing except to reduce the flexibility and competitiveness of the loan market.

So far, though, the government’s approach has gone unrebuked by the courts because lenders are encouraged to settle rather than fight.Ally Financial , GM’s former credit arm, and several others already have forked up $154 million to borrowers whom BISG has identified as protected minorities who received less advantageous terms than the average of those whom BISG identified as white males.

Kindly avert your eyes from the fact that many white males also got less advantageous terms than the white-male average, but they won’t be receiving checks except in the apparently non-negligible cases where BISG mistakenly identified them as black, Hispanic and/or female.

That our government stoops to such charlatanism should leave you queasy. “Prosecutorial discretion” exists to avoid injustice not cause it. One would like to think a sincere if absurdly overzealous sense of fairness is at work here. Unfortunately, the truth may be that our government has simply fallen into the hands of liars and chiselers who have identified a shakedown that the current legal and political culture will let them get away with.

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Finding Racism Where It Isn’t
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