With the stroke of a pen, President Trump nullified the 2013 informal guidance on “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” (Guidance) issued by the Consumer Financial Protection Bureau (CFPB or Bureau)—now preferring to be known as the Bureau of Consumer Financial Protection—when he signed into law S.J. Res. 57 on May 21, 2018. His signature was the culmination of a joint Congressional resolution put into motion when the U.S. Senate voted 51-47 on April 18, 2018, to repeal the Guidance (Joe Manchin of West Virginia was the sole Democratic affirmative vote) and the House of Representatives voted in favor of repeal by a count of 234-175 on May 8, 2018.
As explained in greater detail below, the CFPB Guidance was an attempt to scrutinize indirect auto lenders for allegations of discriminatory lending related to their sharing of dealer markups with automobile dealers. The Bureau believed that the difference in interest rates between that offered by the lender to the dealer to “buy” the loan and the actual contractual rate negotiated between the dealer and the consumer created a significant risk for pricing disparities on a prohibited basis.
The Guidance was repealed by Congress pursuant to the Congressional Review Act (CRA or Act). Prior to 2017, the CRA mechanism had been used only once since passage of the Act in 1996. Even more remarkably, the CRA had never before been used to repeal informal guidance promulgated by a regulatory agency.
Generally speaking, the Act allows Congress to use an accelerated legislative process to review regulations promulgated by federal government agencies (including independent agencies such as the CFPB) and, upon an unfavorable evaluation, override the agency regulation by passage of a joint resolution. The Act provides Congress 60 legislative-session days in which to repeal the regulation by simple majority vote of each house and submit a resolution of disapproval for signature by the president and subsequent assignment of a Public Law number. Importantly, a repeal under the CRA also prevents the agency from future issuance of a rule substantially similar to the repealed regulation, absent specific new legislative authorization. If the joint resolution of disapproval is not passed by both houses, the regulation goes into effect according to its terms.
As noted, the Guidance was issued in 2013. Given that the 60-legislative-day timeframe for Congressional review had long since passed, Senator Pat Toomey (R-PA) requested in 2017 a determination by the Government Accountability Office (the GAO) that the informal Guidance was actually a rule that should have been subjected at the time of its drafting to the notice-and-comment rulemaking process of the Administrative Procedures Act. The Senator’s objection rested largely on the fact that the regulation at issue targeted—in a round-about way—the pricing practices of automobile dealerships, an industry group that was explicitly exempted in the Dodd-Frank Act from Bureau oversight.
The 60-legislative-day clock for the CRA process began here with the GAO’s ultimate determination on December 5, 2017, that the Guidance was, for all intents and purposes, a rule. The GAO found that, even though the Guidance was a non-binding “general statement of policy,” the three major components of the definition of a “rule” under the CRA were still present: “(1) an agency statement, (2) of future effect, . . . (3) designed to implement, interpret, or prescribe law or policy.” In other words, because the Guidance was “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, . . . it is a rule subject to the requirements of CRA.”
Because indirect auto lenders may act as assignees to retail installment sales contracts transacted between automobile dealers and consumers, the Guidance sought to establish a framework wherein an indirect auto lender may be considered a “creditor” within the scope of the Equal Credit Opportunity Act (ECOA) prohibition against illegal discrimination. Under the ECOA, it is illegal for a creditor to discriminate against a credit applicant during any aspect of a credit transaction because of the applicant’s membership in a legally protected class. The ECOA defines a creditor to include “any assignee of an original creditor who participates in the decision of whether or not to extend . . . credit.” ECOA’s implementing regulation, Regulation B, clarifies that an “assignee, transferee, or subrogee” who, “in the ordinary course of business, regularly participates in the decision of whether or not to extend credit” is also a creditor subject to the regulations. The legally binding Commentary to Regulation B further explains that such covered participation in the credit decision “may include an assignee or a potential purchaser of the obligation who influences the credit decision by indicating whether or not it will purchase the obligation if the transaction is consummated.”
According to the Guidance, “the standard practices of indirect auto lenders likely constitute participation in a credit decision . . . when it evaluates an applicant’s information, establishes a buy rate and then communicates that buy rate to the dealer, indicating that it will purchase the obligation at the designated buy rate . . . .” The Guidance also suggests that entities should not find comfort in the Regulation B provision that its proscriptions do not apply with respect to violations by another creditor unless the assignee, transferee or subrogee “knew or had reasonable notice of the act, policy, or practice that constituted the violation before becoming involved in the credit transaction.” Instead, the Guidance clarifies that a covered creditor will be liable for its own ECOA violations when, “for example, disparities on a prohibited basis . . . result from the creditor’s own markup and compensation policies,” or when it “may have known or had reasonable notice of a dealer’s discriminatory conduct . . . .”
There were a number of questionable aspects of the Bureau’s Guidance that led to the request for Congressional reconsideration under the CRA. First and foremost, the Guidance appeared to many to be a disguised end-run attempt by the CFPB to regulate automobile dealers who, as previously noted, were specifically exempted from Bureau jurisdiction, given that many automobile dealers rely, to some degree, on indirect lenders to finance automobile purchases by consumers.
Second, the Guidance reaffirmed the long-standing joint financial regulatory agency fair lending policy, asserting that the interagency interpretation of the ECOA construct allows for findings of both illegal disparate treatment and disparate impact, as applicable in the circumstances. But because of the way in which a finding of disparate treatment is evidenced, particularly in the absence of any class membership information (in contrast to the government monitoring information available in the residential mortgage lending context), the Bureau essentially hangs its hat in the indirect auto lending context on a disparate impact theory.
There are two primary problems with this approach. For one thing, it is not clear that the ECOA statutory text supports a disparate impact legal framework, in which the effect of a policy on an entire prohibited class is at issue, as distinguished from an analysis of discriminatory treatment that may be accorded one or more individuals. Importantly, the ECOA proscribes discriminatory treatment “against any applicant on the basis of” that individual’s membership in a protected class, but contains no explicit prohibition related to discriminatory effect. An additional dilemma regarding the application of disparate impact in the indirect auto lending context concerns the limitations imposed by the ECOA itself on the collection of an applicant’s demographic characteristics in non-residential mortgage credit transactions. As a consequence, a combination of applicant name- and geography-based information was used by the CFPB, in a statistical proxy method known as geocoding, to determine the probability that any single applicant was a member of a protected class. The individual proxy information was then combined across all applicants in order to analyze the composite membership of each lender’s applicant pool, by protected class, to determine whether pricing disparities might be present at a statistically significant level.
A third disputed element of the Bureau’s Guidance that led to Congressional reconsideration under the CRA was an assertion by the industry that the Guidance did not truly reflect the way the industry actually functions. The industry contended that a mischaracterization of the buy rate of the assignee, as the rate to which a borrower should be entitled, failed to recognize that a legitimate mark-up is part of the normal retail business model. The industry further argued that in a significant number of transactions, the dealer enters into a retail installment sales contract with the consumer prior to any response from an indirect auto lender as to the rate at which the lender may later purchase the loan from the dealer. In those situations, the indirect auto lender has not participated in the credit decision and is therefore not a “creditor” subject to the ECOA. The industry also maintained that there is no actual practice of “dealer discretion” in which the indirect lender participates; the lenders say they are unable to give automobile dealers discretion to deviate from an interest rate the dealer was never obligated to use in the first place.
As earlier stated, the repeal of this Guidance under the CRA will prevent the Bureau from future issuance of a substantially similar rule, absent specific new legislative authorization. Such instruction raises the question as to the extent any future rulemaking regarding fair lending regulation of indirect auto lending under ECOA principles will be limited. Certainly regulation regarding dealer markup and compensation policies will be off limits, but it is questionable as to whether the CRA may table future rulemaking as to disparate treatment claims alleging ECOA violations. Fortunately for the indirect auto lending industry, practical application of ECOA disparate treatment in this context is difficult due to the absence of the demographic characteristics of each loan applicant at the stage in which a subject “creditor” would participate in the credit decision, rendering it less likely that future indirect auto fair lending rules will be pronounced.
Interestingly, CFPB Acting Director Mulvaney signaled in a May 21, 2018, press release following the President’s signature of S.J. Res. 57 that he intends to revisit ECOA requirements in light of the 2015 “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 . . . .” Acting Director Mulvaney also expressed his intent for the Bureau to work with Congressional staff and federal prudential banking regulators to determine whether there is additional informal guidance, whether promulgated by the Bureau acting alone or on an interagency basis, that should be subjected to CRA review.
We will continue to monitor all consumer financial regulatory compliance developments and report on future events.