WASHINGTON, D.C. — On Wednesday, five years and about a month since the Consumer Financial Protection Bureau (CFPB) put auto finance sources on notice for policies that allow dealers to mark up interest rates in exchange for service rendered, the U.S. Senate voted 51-47 to approve legislation aimed at repealing the guidance containing the regulator’s warning.
The vote also comes five months after the Government Accountability Office said Congress has the power under the Congressional Review Act (CRA) to repeal the CFPB’s March 2013 guidance on dealer participation, and about a week after Sen. Pat Toomey (R-Pa.), the lawmaker who asked the GAO to review the bureau’s guidance one year ago, pledged that the U.S. Senate Banking Committee would scrap the rule.
“The CFPB, under [former CFPB Director] Richard Cordray, frequently overstepped its authority while snubbing Congress and the public in the process. This auto lending guidance is an example,” Sen. Toomey said on Tuesday just prior to the U.S. Senate’s 50-47 vote in favor of debating whether to undo the bureau’s guidance. “I appreciate the GAO’s decision in this matter and encourage my colleagues to support this CRA resolution.”
Sen. Jerry Moran, who introduced the joint resolution of disapproval, S.J. Res. 57, on March 22, added: “An ill-advised Obama-era auto-lending rule issued by the CFPB missed the mark on both process and substance. This resolution of disapproval provides Congress the opportunity to reverse this overreaching rule to return a sense of stability to the auto marketplace, ultimately providing a path to lower costs for all car purchasers.”
The process used to repeal the bureau’s guidance is the same Congressional Republicans used this past October to kill the CFPB’s rule banning pre-dispute arbitration. Today’s vote marked the first time it was used on a rule that has been in effect for several years.
Under the CRA, both houses must approve resolutions of disapproval by a simple majority and receive the president’s signature to kill a regulation. Today’s vote on the Senate version of the joint resolution of disapproval leaves it up to the House of Representatives to approve its version of the legislation, H.J.Res.132. It currently sits in the House Committee on Financial Services and is expected to be approved when it goes before the full House.
“S.J.Res. 57 continues the bipartisan effort that began years ago to preserve the ability of local dealerships to offer discounted auto loans to their customers, and we thank Senator Toomey and Senator Moran for their leadership on this issue,” said Peter Welch, President and CEO of the National Automobile Dealers Association (NADA). “America’s franchised auto dealers strongly believe that every customer deserves to be treated fairly, and that there is no room for discrimination of any kind in auto retailing — period. This is a narrowly tailored resolution that in no way modifies or affects the enforcement of any fair credit laws or regulations. But it does take the important step of ensuring that consumer discounts in auto lending are safeguarded for every consumer.
“We hope this CRA resolution sees swift action in the House of Representatives, which has already demonstrated strong bipartisan support for repealing the CFPB’s flawed guidance and preserving important auto loan discounts for consumers.”
The CFPB alleged in its five-page fair lending guidance that bank policies which allow auto dealers to mark up interest rates on retail installment sale transactions as compensation for services rendered create a significant risk of unintentional, disparate impact discrimination. It also warned lenders active in the indirect auto finance channel that they would be held liable for unlawful, discriminatory markups.
The bulletin goes on to state that lenders operating in the indirect auto finance channel “should take steps to ensure that they are operating in compliance with the [Equal Credit Opportunity Act] and Regulation B as applied to dealer markup and compensation policies.” It then listed a variety of steps and tools they could employ to address the bureau’s stated fair lending risks, including “eliminating dealer discretion to markup buy rates and fairly compensate dealers using another mechanism, such as a flat fee per transaction, that does not result in discrimination.”
Auto industry trade groups have argued that the bureau used its guidance to indirectly regulate the activities of dealers, which are mostly exempt from the bureau’s oversight under the Dodd-Frank Act. They also claimed the bureau was aware its methodology for determining disparate impact and potential harm to protected classes was flawed and prone to overestimation, yet pushed forward with claims of discrimination that resulted in enforcement actions that imposed millions of dollars in fines on auto finance sources, including Ally Financial, American Honda Finance Corp., and Fifth Third Bank.
The guidance also caused several finance sources, including BB&T and BMO Harris, to switch to a flat-fee compensation model. BB&T switched back to a dealer spread compensation plan last month, while BMO switched to a three-tiered flat-rate system last summer.
The guidance was also behind consent orders the CFPB entered into with Fifth Third Bank, Toyota Motor Credit Corp., and American Honda Finance Corp regarding their dealer markup policies. As a result of those orders, the bank and two captives agreed to lower their markup caps to 1.25% and 1%. Fifth Third’s consent order, however, is set to expire this September, while Toyota Motor Credit’s and Honda Finance’s consent orders are set to expire in February 2019 and July 2020, respectively. The three finance sources yet to say whether they’ll return to a dealer participation model when they do.
"The CFPB, established to regulate Wall Street, never should have involved itself in dealership operations," said AIADA President and CEO Cody Lusk. "Today's vote is confirmation to dealers everywhere that the agency overreached when issuing its 2013 indirect auto financing guidance. The agency concluded, without accurate supporting data, that dealerships were using race as a determining factor when issuing loans. Today the Senate has righted a wrong."
Congress has attempted to kill the bureau’s guidance through the legislative route. In November 2015, the House of Representatives approved the Reforming CFPB Indirect Auto Finance Guidance Act by a 332-96 vote. The bill, however, was not acted upon by the Senate before the end of the 114th Congress.
Last March, Sen. Toomey asked the GAO whether the CFPB’s guidance on dealer participation falls under the CRA. The agency delivered its answer this past December, writing in a letter to Toomey that it did.
When it initially issued its guidance, the bureau argued that because it had no legal effect on regulated entities, the CRA does not apply. The GAO, however, stated in its response to Toomey’s request that the bulletin “fits squarely within the Supreme Court’s definition of a statement of policy,” because it provides information on the manner in which the bureau planned to exercise its discretionary enforcement power.
And according to the GAO, the CRA “establishes special expedited procedures under which Congress may pass a joint resolution of disapproval that, if enacted into law, overturns the rule.” In a statement posted on its website just after the GAO delivered its answer, Sen. Toomey he intended “to do everything in my power to repeal this ill-conceived rule using the Congressional Review Act.”
“The vehicle finance market in the United States is a highly competitive market which benefits consumers as dealers and lenders discount pricing and loan rates to sell and finance new and used vehicles,” said Chris Stinebert, president and CEO of the American Financial Services Association, a trade association representing vehicle finance sources. “The vote today is in the best interests of the car-buying public.”