Consumer Finance Insights
April 24, 2018

Senate Takes Steps to Repeal CFPB Indirect Auto Lending Guidance

On April 17, 2018, U.S. Senate Majority Leader Mitch McConnell (R-KY) announced that the Senate would seek to repeal the Consumer Financial Protection Bureau’s (CFPB’s) indirect auto lending guidance.  The Senate passed a joint resolution of disapproval under the Congressional Review Act (CRA) on the following day, thereby sending the resolution to the U.S. House of Representatives, where it is expected to similarly pass.  115th Cong. S.J. Res. 57 (2018).

The guidance, effective as of March 21, 2013 and titled “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act,” targets fair lending concerns involving auto loans where dealers provide financing through third party institutions.  In these indirect auto lending transactions, the auto dealer submits the consumer’s information to several prospective lenders.  A lender may provide the dealer with a “buy rate,” which is a minimum interest rate at which the lender will agree to purchase the sales contract.  In some transactions, the lender permits the dealer to charge consumers an even higher interest rate and retain the difference.  Some lenders offer this “dealer reserve” so as to compensate dealers for referring them business.

The CFPB determined that dealer reserves “result in pricing disparities on the basis of race, national origin, and potentially other prohibited bases,” which run afoul of the Equal Credit Opportunity Act (ECOA).  ECOA prohibits creditors from discriminating “on the basis of race, color, religion, national origin, sex or marital status, [] age; … because … the applicant’s income derives from any public assistant program; or … because the applicant has in good faith exercised any right under” the Consumer Credit Protection Act.  15 U.S.C. § 1691(a).

The CFPB believed that indirect auto lenders were operating under a misconception that they could not be liable under ECOA because they did not meet the definition of a “creditor” under the statute and its implementing regulation, Regulation B (12 C.F.R. § 1002.2(l)).  The guidance corrected this perceived misconception and warned that indirect auto lenders may face liability under disparate treatment and disparate impact fair lending theories should pricing disparities exist.  The guidance encourages financial institutions to comply with ECOA and Regulation B by:

  1. Monitoring and controlling dealer markup and compensation policies “to address unexplained pricing disparities on prohibited bases; or” eliminating the use of dealer mark ups; and
  2. Implementing fair lending compliance programs to address fair lending issues present in indirect auto lending.

As LenderLaw Watch previously reported, Congress can use the CRA to submit a joint resolution of disapproval of an agency rule to effectuate a repeal.  5 U.S.C. § 802.  The CFPB assumed that its auto lending guidance was not subject to the CRA because it was non-binding.  However, last fall, Senator Pat Toomey (R-PA) asked the Government Accountability Office (GAO) to opine on whether that was, in fact, the case.  The GAO issued an opinion on December 5, 2017 recognizing that the guidance was non-binding, but nonetheless concluding that it is subject to the CRA because it “advises the public prospectively of the manner in which the CFPB proposes to exercise its discretionary enforcement power.”

As a result, the Senate took steps on April 18 to nullify the guidance.  The joint resolution next proceeds to the U.S. House of Representatives, and if it passes there, will proceed to the President for his signature.  Given that the House previously introduced an identical joint resolution on April 10, 2018 (H.J. Res. 132), it appears likely that the resolution will make its way to the President’s desk for approval.

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