Legal challenge to CFPB passes first hurdle

Attempts to bring in legislation to limit the activities of the Consumer Financial Protection Bureau (CFPB) in its efforts to regulate the auto finance industry have overcome the first hurdle, with a bill passed by the House of Representatives last week.

“H.R. 1737 — the Reforming CFPB Indirect Auto Financing Guidance Act” would revoke 2013 auto lending guidance from the CFPB which attempts to eradicate dealer mark ups.

The guidance suggests lenders should either impose limits on or eliminate dealerships’ ability to adjust, on a case-by-case basis, the amount of compensation they keep for arranging a consumer auto loan, a discretionary practice that the CFPB says can lead to discriminatory loan pricing.

Dealer opposition

The agency’s current remit covers auto finance lenders, but not dealers, and the National Automobile Dealers Association (NADA) has been very active in the campaign to limit the CFPB’s powers.

“The CFPB is clearly trying to eliminate a consumer’s ability to receive a discount on credit in the showroom. It is reasonable for Congress to ask for minimal due process to protect consumers,” said NADA president Peter Welch. “The CFPB’s action will raise credit costs for consumers. We commend Congressmen Guinta and Perlmutter for working on a bipartisan basis to protect car buyers.”

The bill was passed on a 332-96 vote, with 244 Republicans and 88 Democrats voting in favour. All of the ‘no’ votes were Democrats. However, before any legislation is passed, the bill has to get through the Senate and be approved by President Obama, which is likely to prove a significant challenge.The Obama administration has already it opposes the bill because the CFPB guidance “helps ensure customers are not charged disproportionately higher prices for auto loans because of their race, color, religion or other characteristics that should have no bearing on loan decisions.”

The proposed legislation would require the CFPB to give notice and open a public comment period before issuing guidance and to make public the data, methodologies and other information the bureau leans on, among other measures.

The CFPB says lenders’ practice of allowing dealerships to vary the amount of reserve they take on loans has resulted in minorities and other legally protected groups paying higher interest rates than other borrowers, even if the lender did not intend to discriminate.

The agency labels this outcome a “disparate impact”. NADA and other dealer groups have been highly critical of the CFPB’s proxy methodology for determining discrimination, saying it is flawed and produces skewed results.

Fair compliance program

NADA has been arguing that the CFPB should embrace the fair credit compliance program proposed by NADA, the National Association of Minority Automobile Dealers (NAMAD), and the American International Automobile Dealers Association (AIADA), which allows a dealer to discount credit rates for consumers when there is a legitimate business reason for doing so that is unrelated to the consumer’s background.

The NADA/NAMAD/AIAD Fair Credit Compliance Program is based on a platform developed in 2007 and on consent orders established by the Civil Rights Division of the US Department of Justice. NADA says many dealerships have adopted this program, which has been reviewed and approached by specialist compliance attorneys.

“The Department of Justice has already developed a way to address fair credit risk in auto financing while preserving competition,” Welch said. “It’s a viable, common-sense solution, and the government should preserve the benefits of a competitive auto finance market that benefits all consumers.”

In the past 18 months the CFPB has been investigating lenders that allow dealer reserve for what it says could be unfair lending practices. Ally Financial, American Honda Finance and Fifth Third Bancorp all reached settlements with the bureau, ranging from $18 million to $98 million. Honda Finance and Fifth Third both capped dealer reserve rates as part of the settlement; Ally did not. None of the lenders admitted wrongdoing.