This week, the House voted to repeal the Consumer Financial Protection Bureau’s (CFPB) 2013 guidance on “dealer markups,” or the additional interest car dealerships routinely add to a third-party loans as extra compensation. The Senate voted to repeal the guidance last month. Supporters of the CFPB’s rules say they were put in place to guard against racial profiling and discrimination in auto lending, which leads to non-white car shoppers paying higher interest rates than white customers with similar credit profiles.
The guidance, which was put in the form of a bulletin and never formalized into law, was intended by the Obama administration to ensure compliance with the fair lending requirements of the Equal Credit Opportunity Act (ECOA), which dictates that loan origination should be as objective as possible.
“In indirect auto financing, the dealer usually collects basic information regarding the applicant and uses an automated system to forward that information to several prospective indirect auto lenders,” according to the 2013 guidance. “After evaluating the applicant, indirect auto lenders may choose not to become involved in the transaction or they may choose to provide the dealer with a risk-based ‘buy rate’ that establishes a minimum interest rate at which the lender is willing to purchase the retail installment sales contract executed by the consumer for the purchase of the automobile.”
The CFPB’s guidance was the foundation for several discrimination lawsuits against car dealerships. In late 2013, the CFPB and the Justice Department sued Ally Financial and ordered it to pay approximately $80 million in fines and damages on behalf of more than 235,000 minority borrowers who were determined to have paid higher interest rates for their auto loans between April 2011 and December 2013 because of discriminatory pricing. Similar lawsuits were filed against Honda and Toyota. Supporters of the CFPB guidance maintain that it’s necessary to protect the rights of minority car shoppers.
“Financial institutions that make auto loans have an obligation not to discriminate against borrowers based on the color of their skin,” said Rep. Carolyn Maloney (D-N.Y.).
Advocates for overturning the guidance said lenders are committed to fairness and that the CFPB guidance should never have been implemented the way it was, essentially “exploiting a loophole.”
“An ill-advised Obama-era auto-lending rule issued by the CFPB missed the mark on both process and substance,” Senator Jerry Moran (R-Kan.) said in a press release. “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 CFPB guidance was repealed by the House using the Congressional Review Act, a seldom-used set of “fast-track” tools that allows Congress to undo rules issued by agencies and regulators. For formal laws, the CRA can be put into action for only 60 days after the new regulation is submitted to Congress. This marks the first time it has been used to reverse administrative guidance, and supporters of the repeal argued that the 60-day window does not apply. The CRA also prevents federal agencies from re-enacting “substantially similar” regulations in the future, which means that future consumer protections for auto loan borrowers would require formal Congressional legislation.
The vote to set aside the guidance was 234 to 175, largely along party lines, with Republicans voting for the repeal and Democrats voting against it.