Nullification of Auto Loan Rule Has Broad Implications

It only impacts auto lending, but if Mick Mulvaney, acting director of the Consumer Financial Protection Agency (CFPB) keeps his word, a Congressional resolution signed by the President on Monday is likely to have an eventual impact on mortgage and other lending as well.  The Joint Resolution, S.J. Res. 57, sponsored by Senator Jerry Moral (R-KS) and Rep Lee Zeldin (R-N.Y.) used the Congressional Review Act (CRA) to formally disapprove a rule from CFPB relating to "Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act"(ECOA).  This causes that rule to "have no force or effect."

Some background, and because today there always seem to be two various of facts, we summarize the story from both perspectives, that of the National Auto Dealers Association (NADA) and of The Leadership Conference on Civil and Human Rights.

What is clearly fact, is that many car buyers finance their purchases through indirect financing at dealerships. Dealers submit customers' applications to lenders who respond with a 'buy rate." NADA says dealers often discount an interest rate to "meet or beat" a competitor's rate or meet a consumer's budget needs.  The Leadership Conference says the dealer can then add as much as 2-2.5 percent to the buy rate and keep part or all of the difference as compensation.  They maintain that these mark-ups often resulted in borrowers paying a higher rate than that for which they qualified.

In the 1990s there were several lawsuits against the largest auto finance companies in the country alleging racial and ethnic discrimination, claiming borrowers of color were twice as likely to have their loans marked up, and paid markups twice as large as similarly situated White borrowers with similar credit ratings. CFPB used data from these suits  and evidence of continuing discrimination to, according to the Leadership Council, issue guidance in 2013 "informing indirect auto lenders that they can ensure compliance with the Equal Credit Opportunity Act by paying compensation to dealers in ways that do not involve manipulations of the interest rate. For lenders that chose to continue allowing dealers to engage in interest rate markups, the guidance recommends other steps they can take to ensure that discrimination does not occur."

NADA says, CFPB based its policy on the claim that discounted interest rates create a fair-credit risk, but a nonpartisan study of the agency's policy found a 41 percent and CFPB's own review found a 20 percent error rate in classifying the background of a significant group of consumers. Its 2013 guidance "pressured auto lenders to eliminate or limit a dealer's ability to discount credit for consumers. By limiting market competition, the CFPB's policy would have increased the overall cost of auto loans for consumers."  CFPB knew of these serious flaws yet failed to correct them.

Skip to the present. A Congressional Budget Office review of the CFPB rule found it was subject to Congressional review and the Joint Resolution was passed.  Yesterday Mulvaney, who has frequently stated his opposition to the existence of CFPB, issued a statement thanking Congress and the President "for reaffirming that the Bureau lacks the power to act outside of federal statutes" and stating the rule was a solution in search of a problem.

Mulvaney continued, "The enactment of this Congressional Review Act (CRA) resolution does more than just undo the Bureau's guidance on indirect auto lending. It also prohibits the Bureau from ever reissuing a substantially similar rule unless specifically authorized to do so by law. 

"Given a recent Supreme Court decision distinguishing between antidiscrimination statutes that refer to the consequences of actions and those that refer only to the intent of the actor, and in light of the fact that the Bureau is required by statute to enforce federal consumer financial laws consistently, the Bureau will be reexamining the requirements of the ECOA."

The acting director said the resolution clarifies that other CFPB guidance may fall under Congressional review, something CFPB says it welcomes. It will, he says, confer with Congressional staff and federal agency partners to identify documents for submission.

We think one can draw a conclusion from this activity that Congressional nullification of CFPB rule-making will not stop with auto lending and suspect that the next rules called into question could be those dealing with loan officer compensation and loan pricing.  Stay tuned.