House expected to soon join Senate in voting to kill CFPB’s rule on indirect auto lending

Senators voted 51-47 Wednesday to disapprove a rule – adopted five years ago as guidance – outlining indirect auto lenders’ compliance with fair lending requirements, including caps on interest rates.

The bill now heads to the House, which is expected to quickly pass it. President Donald Trump is also expected to sign the measure into law.

In a statement, House Financial Services Chairman Jeb Hensarling (R-Texas) noted that the House “voted decisively last Congress” to repeal this guidance and require future efforts to go through public notice and comment. “I applaud my colleagues in the Senate for standing up for the rule of law, and I look forward to finally repealing this harmful and flawed bulletin very soon,” he said.

According to some reports, the vote marks the first time since legislation giving Congress power to overturn federal rules – under the 1996 Congressional Review Act – that the Senate has voted to rescind action taken by an agency years ago, instead of just within the narrow window prescribed by the law (60 business days since the rule went into effect).

The vote to reject the rule was mostly along party lines; the only Democrat to vote in favor of negating the rule was Sen. Joe Manchin (D-W.Va.).

The rule was initially adopted as guidance by the Consumer Financial Protection Bureau (CFPB) in 2013. The guidance contained the consumer agency’s 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 outlined 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.

Late last year, however, 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.

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