Sometimes government regulators do funny things.  Sometimes their actions reflect that they are non-economic actors, sometimes its political, sometimes its bureaucracy and sometimes there is just no reason at all because no one knows who made the original decision. The recent Ally Bank borrower discrimination settlement in which no one knows who was actually discriminated against is a good example.

M. C. Escher: "ESCHER on ESCHER Exploring the Infinite", p. 66 Published in 1989 by HARRY N. ABRAMS, INC., New York Drawing Hands
M. C. Escher: “ESCHER on ESCHER Exploring the Infinite”, p. 66
Published in 1989 by HARRY N. ABRAMS, INC., New York
Drawing Hands

In 2013 the Department of Justice (“DOJ”) and the Consumer Financial Protection Bureau (“CFPB”) commenced actions against Ally Bank. The DOJ action was a civil action filed in Michigan, while the CFPB action was commenced as an administrative matter before the CFPB.

The crux of the allegations was that “…between April 1, 2011 and the present, Ally engaged in a pattern or practice of discrimination on the basis of race and national origin in violation of the ECOA based on the interest rate “dealer markup”—the difference between Ally’s buy rate and the contract rate—paid by African-American, Hispanic, an Asian/Pacific Islander borrowers who received automobile loans funded by Ally.”  DOJ Consent Order.  Ally did not admit to any wrongdoing.

Long story short, Ally simply agreed to pay $80 million in monetary damages, which were to be paid to the minorities who were allegedly discriminated against with the higher rates.  (This is in addition to $18 million in civil fines.)  The problem was, Ally was legally unable to know the races of any of its borrowers, so the DOJ and CFPB have no idea who gets the money.

To fix the problem, the DOJ and CFPB are using a complex methodology which, based on what I have read, seems to try to identify minorities by last name and location. The methodology, which is admitted to be less than totally accurate, is apparently the best option.

So, in case you missed that, the DOJ and CFPB are looking at last names to find minority borrowers to send money on account of borrower discrimination because the bank has no way of knowing who the minority borrowers are.

As I mentioned above, sometimes government regulators do funny things, like develop complex ways to isolate minority borrowers for compensation for discrimination when the lender has no way of knowing who are minorities they are alleged to have wronged.

In fairness, there may have been some smoking gun piece of evidence that the DOJ found which never made it to the light of day.  But, absent that, it seems at least possible that lenders could get sued by the DOJ and the CFPB for discrimination when even the lender doesn’t know who it is discriminating against.

DOJ consent order is here.

Read more here on The Detroit News.