On Nov. 18, 2015, the House of Representatives voted to pass H.R. 1737, the Reforming CFPB Auto Financing Guidance Act, which would nullify CFPB Bulletin 2013-02, entitled “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act.” The bill passed in the House with bipartisan support 332-96.
CFPB Bulletin 2013-02 provides fair-lending guidance to the indirect auto lending industry. The Bulletin has been viewed by many as an effort to indirectly regulate auto dealers even though the Dodd-Frank Act expressly prohibits the CFPB from exercising rulemaking, supervisory, enforcement, or any other authority with respect to such dealers. Following the CFPB’s issuance of the Bulletin, members of Congress and industry participants attempted to obtain the data and methodology that the CFPB used in developing its guidance. In response, the CFPB released a white paper providing some details on the disparate impact methodology it employs in enforcing ECOA. Unlike mortgage lenders, auto lenders do not collect data about the race and gender of loan applicants. As a result, the CFPB evaluate ECOA compliance using “proxy” data based on certain assumptions it makes about whether a particular borrower is a minority. These assumptions are based on surnames, geographic location, or a combination of both. Many believe that the CFPB’s method overestimates disparities in loan pricing. Members of Congress and industry observers claimed that the CFPB’s white paper failed to provide sufficient information to show how the CFPB’s method is applied in ECOA enforcement.
The House bill was introduced in April 2014 by Reps. Frank Guinta (R-N.H.) and Ed Perlmutter (D-Colo.). It would require the CFPB to: (1) impose a public notice and comment period prior to the issuance of any final guidance by the CFPB; (2) publish all studies and data it used in reaching its guidance; and (3) conduct a study on the costs and impacts of the guidance to consumers and women-owned, minority-owned, and small businesses. The bill currently has 166 co-sponsors, including 65 democrats.
On the heels of its vote to nullify the Bulletin, the Financial Services Committee of the House issued a report on Nov. 25, 2015, entitled “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending.” The Report criticizes the CFPB for knowingly using unsound methodology to challenge auto lending practices based on allegations of discrimination. Among other things, the Report calls into question the CFPB’s reliance on “disparate impact” analysis to take enforcement action against auto lenders. The Report also accuses the CFPB of pursuing “its radical enforcement strategy using ‘unfair, abusive, and deceptive,’ tactics. The Report specifically criticized the CFPB for targeting one particular lender that was undergoing a restructuring because it knew the company would settle quickly to avoid difficulty in obtaining government approval of its transaction. In that proceeding, the company agreed to pay $80 million to minority borrowers and $18 million in penalties based on the CFPB’s and the DOJ’s allegations that more than 235,000 borrowers paid higher rates for auto loans because of discriminatory pricing.
Representative Jeb Hensarling, chairman of the Financial Services Committee, issued a statement in connection with the release of the Report, further criticizing the CFPB for “irresponsibly branding companies with the stigma of racial discrimination based on nothing more than junk science that even CFPB senior officials acknowledged is gravely flawed. Why? To cudgel those companies into enormous monetary settlements without ever having to go to court. If it sounds like a shake down, that’s because it is.”
The CFPB maintains that its actions against auto lenders help ensure that discrimination does not increase the cost of auto loans for consumers. Prior to the House vote, the Leadership Conference of Human and Civil Rights, which supports the CFPB’s efforts, submitted a letter to members of the House, emphasizing that the CFPB was the first and only regulator to address this type of discrimination and citing estimates from the Center for Responsible Lending indicating that dealer mark ups cost consumers billions of dollars over the lives of their loans.
The bill now heads to the U.S. Senate, where industry experts believe it may face some hurdles.
CFPB Bulletin 2013-02: http://files.consumerfinance.gov/f/201303_cfpb_march_-Auto-Finance-Bulletin.pdf
Chairman Jeb Hensarling’s press release: http://financialservices.house.gov/news/documentsingle.aspx?DocumentID=399984
Link to Leadership Conference Letter:http://civilrightsdocs.info/pdf/policy/letters/2015/Leadership-Conference-letter-opposing-HR1737-11-17-15.pdf