Great America

Elizabeth Warren’s Consumer Protection Scam

In Elizabeth Warren’s America, Middle America will pay the price for the imagined racism of algorithms.

Senator Elizabeth Warren (D-Mass.) may no longer be running for president, but her agency lives on.

The Consumer Financial Protection Bureau (CFPB) doesn’t want to be controlled by the Trump Administration. The Supreme Court might end the agency’s streak of independence later this year. Ostensibly, the CFPB aims to protect ordinary Americans from untoward business practices. Instead, it only advances left-wing causes and identity politics. 

Warren proposed the CFPB in 2007 when she was a Harvard law professor. President Barack Obama established it in 2010. It is supposed to protect Americans from malpractice in the financial industry, yet the CFPB’s main task during the Obama Administration was fighting “disparate impact.” Disparate impact is a legal concept that considers racially disproportionate outcomes as evidence of discriminatory policies, even if the policies had no discriminatory intent and were administered objectively.

CFPB’s first director, Richard Cordray, said in a 2012 speech that one of the core missions of his agency was to protect “communities of color” from disparate impact. He added that “it is important to recognize that this subtle but powerful form of discrimination creates damages that are no less direct than the kind of overt and blatant discrimination that, we hope and assume, is increasingly a relic of a bygone era.”

In 2013, CFPB officials claimed they “found substantial and statistically significant disparities between the interest rates paid by African American, Hispanic, and Asian car buyers compared to the interest rates paid by white car buyers with similar credit scores and other factors.” The agency issued a “guidance” letter urging banks to step up their anti-discrimination practices and pressure car dealers to follow suit. In turn, banks told car dealers they would have flat fees imposed if they didn’t comply. Dealers could no longer offer flexible financing deals to consumers. 

The CFPB used dubious methodology. The Equal Credit Opportunity Act bars lenders from collecting data on race, sex, and ethnicity. Thus, banks can’t provide reliable racial data. Therefore, the CFPB guessed applicants’ races based on last names and addresses. Worse, CFPB officials knew this analysis wasn’t accurate. A 2013 CFPB memo claimed there was “reason to believe that our proxy is less accurate in identifying the race/ethnicity of particular individuals than some proprietary proxy methods that use nonpublic data.” 

Internal documents show that the agency planned to hide its dubious research methods. When some information was eventually released, analysts discredited it. The Wall Street Journal determined that the CFPB’s algorithms couldn’t figure out the race of someone with the surname “Obama.” According to one analysis, “Only 54% of the applicants identified by the proxy methodology as African-American were actually African-American.”

These ridiculous efforts had serious consequences. Ally Bank was forced to pay out nearly $100 million after the CFPB pressured it over racial discrimination claims. The government also forced expensive settlements on Fifth Third Bank, Toyota, and Honda. The Wall Street Journal concluded that the CFPB’s policy created higher car loan costs for everyone.

The agency used similar methods to analyze mortgage and small-business lending. In 2015, it announced that banks would have to document small business lending by race. The CFPB accused banks of not lending enough to minority-owned businesses and planned to bully them into approving more loans. 

One reason banks are reluctant to loan to nonwhites is that they often have worse credit and higher default rates. A 2016 Freddie Mac study found that nearly half of African Americans have poor credit. Blacks default on student debt twice as often as whites.

Warren’s dream agency blames these outcomes on systemic racism. The CFPB pressures banks to give more loans to nonwhites and punishes them if they don’t.

Republicans fought back. Congress scrapped the CFPB’s auto lending guidance policy last year. President Trump appointed new management that scaled back disparate impact investigations.

This angered Warren. “This is part of the broader Republican attack on the efforts to fight economic discrimination,” she said, urging Senate colleagues to vote against eliminating the guidance policy. Just one Democrat, Joe Manchin of West Virginia, voted to scrap it.

Warren and other progressives are pushing for more investigations of disparate impact. The NAACP and other left-wing groups sent a letter in June demanding that CFPB crackdown on “discrimination” in the student loan industry. Warren herself sent a letter to the CFPB that same month warning that the algorithms used by financial companies to make lending decisions discriminated against “Latinx and African American borrowers.”

Earlier in October, Warren wrote a column for the Boston Globe attacking Housing and Urban Development’s new rules that make it harder to claim housing discrimination. “We should all be in this fight—because this isn’t just about housing, it’s about the kind of America we want to live in,” she wrote.

Elizabeth Warren is right­. It is about the kind of America we want to live in. In her America, algorithms are racist. In her America, protecting consumers means fighting “disparate impact.” In her America, Middle Americans pay the price.