Senate on threshold of vote to disapprove 5-year-old CFPB action setting interest rate caps on indirect auto loans

The Senate was poised Tuesday to disapprove a five-year-old action by the federal consumer financial protection agency outlining indirect auto lenders’ compliance with fair lending requirements, including caps on interest rates.

Senators voted along party lines, 50-47 (with the exception of Sen. Joe Manchin, D-W.Va.), Tuesday to begin debate on the legislation, Senate Joint Resolution 57 (S.J.Res. 57), to invoke the Congressional Review Act (CRA) on the action by the Consumer Financial Protection Bureau (CFPB) in 2013.

A final vote would overturn the CFPB guidance, included in a bulletin – not a rule – issued by the agency containing its views on the applicability of federal fair lending laws to “indirect” auto lending (that is, indirect financing facilitated by a car dealer through a third-party lender).

More specifically, the guidance outlines indirect auto lenders’ compliance with the fair lending requirements of the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B. The bulletin related to policies used by some indirect auto lenders that allow dealers to mark up the interest rate charged to the consumer above the indirect auto lender’s “buy rate.”

According to the bulletin, the lender then compensates the auto dealer based on the difference in interest revenues between the buy rate and the actual rate charged to the consumer in the contract executed with the auto dealer.

In the bulletin, CFPB stated that the incentives created by such policies allow for a significant risk for pricing disparities on the basis of race, national origin or other prohibited bases.

Ultimately, the bulletin concluded that indirect auto lenders “should take steps to ensure that they are operating in compliance with the ECOA and Regulation B as applied to dealer markup and compensation policies.” It then listed a variety of steps and tools that lenders may wish to use to address significant fair lending risks.

However, late last year, in response to a letter from Sen. Patrick Toomey (R-Pa.), the Government Accountability Office (GAO) found that the guidance was, in fact, a rule – and thus subject to the CRA.

In the December letter, GAO General Counsel Thomas H. Armstrong said that the bureau’s March 2013 bulletin “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” meets the requirements of being subject to the congressional review law.

“The Bulletin is of general and not particular applicability, does not relate to agency management or personnel, and is not a rule of agency organization, procedure or practice,” Armstrong wrote, outlining the three exceptions to rules from being subject to the CRA.

“CFPB did not raise any claims that the Bulletin would not be a rule under CRA pursuant to any of the three exceptions, and we can readily conclude that the Bulletin does not fall within any of the those exceptions,” Armstrong noted.

Rather, he stated, the bulletin is a general statement of policy “designed to assist indirect auto lenders to ensure that they are operating in compliance with ECOA and Regulation B, as applied to dealer markup and compensation policies,” he wrote.

Before Tuesday’s vote on S.J.Res. 57, more than 60 consumer groups signed a joint letter urging senators to reject repeal of the guidance, arguing that Congress should have acted five years ago.

“We oppose such a vote, as it would contravene the clear intent of the CRA to allow Congress to review and challenge recently finalized agency actions,” the letter stated. “This would set a dangerous precedent that would open the door for Congress to stretch the CRA to challenge a wide variety of settled agency actions that have been in effect for years or decades, particularly ‘guidance documents’ that are not only crucial to protecting workers, consumers, minorities, the environment, and the economy but also to providing regulatory certainty for businesses and the public.”

The White House issued a “Statement of Administration Policy” Tuesday stating that, if presented the legislation after passage by both houses of Congress, President Donald Trump would sign it.

“The Administration supports Senate passage of S.J. Res. 57,” the statement reported. “This bulletin limits the ability of auto dealers to offer auto loans to their customers and was not issued pursuant to notice-and-comment rulemaking. As a result, the CFPB failed to allow the public to comment before it made significant changes to an important sector of the economy. Further, the Dodd-Frank Act explicitly excludes the regulation of auto dealers from the CFPB’s jurisdiction. Disapproving this bulletin, therefore, would provide consumers with more options for auto financing while ensuring that the CFPB abides by congressional limits on its jurisdiction. Federal regulators would retain their authorities to enforce ECOA with respect to auto lending.”

Once passed by the Senate, the joint resolution will head to the House for approval, then to President Donald Trump for his signature into law.

GAO letter to Sen. Patrick Toomey re: CFPB bulletin/guidance on indirect lending and CRA coverage

Statement of Administration Policy on S.J.Res.57