On November 24, 2015, Republicans on the House Financial Services Committee released a report sharply criticizing the CFPB’s methodology for enforcing the Equal Credit Opportunity Act (ECOA) with regard to indirect automobile lending. The report, entitled, “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending,” adds to the mounting pressure on the CFPB to reevaluate its strategy for enforcing consumer protection laws in the area of auto lending.
At the center of this dispute over the CFPB’s auto lending policies is the Bureau’s March 21, 2013 Bulletin 2013-02: Indirect Auto Lending and Compliance with the Equal Credit Opportunities Act. The bulletin addresses the common auto lending arrangement wherein a car dealer, rather than providing direct financing itself, will shop the auto loan to various potential indirect lenders. If an indirect lender wishes to finance the loan, it will provide the dealer a “buy rate” – the minimum interest rate at which the lender is willing to purchase the loan. Lenders often allow the dealer to mark up that quoted interest rate and keep the difference between the buy rate and the rate paid by the borrower. While the dealer’s ability to mark up its interest rates is, in theory, constrained by its need to offer competitive pricing, the CFPB is concerned that dealers will use this pricing discretion to take advantage of minority borrowers in ways that violate ECOA.
To combat this, the CFPB has taken the position that indirect auto lenders are likely “creditors” under ECOA and may be liable under the statute if their policies of allowing markups result in disparities on the basis of race, ethnicity, gender, or other prohibited bases (Bulletin 2013-02 notes that both disparate treatment and disparate impact are grounds for ECOA liability). And the CFPB has followed through on its application of ECOA to indirect auto lenders: just nine months after it issued its indirect auto lending guidance, the CFPB reached a $98 million settlement with Ally Financial based on allegations that Ally permitted dealers to improperly mark-up auto loans for minority borrowers.
As the November 24th report articulates, opponents of the CFPB’s auto lending policies have taken issue with the CFPB’s approach to indirect auto lending for several reasons. They argue that the practical effect of Bulletin 2013-02 is to regulate auto dealers even though the Dodd Frank Act excludes auto dealers from the CFPB’s regulatory jurisdiction. They also take issue with the CFPB’s approach of issuing “guidance” documents like Bulletin 2013-02 instead of going through the formal rulemaking process – even though such guidance is not technically binding on industry members, the cost of being subjected to a CFPB investigation (even if the entity is ultimately found to be in compliance with the law) is so great that industry members effectively must treat CFPB guidance as if it is binding. Opponents have also questioned whether disparate impact is a viable basis for liability under ECOA.
Additionally, the November 24th report asserts (as does the official report from the House Committee on Financial Services on H.R. 1737, discussed below) that the CFPB’s methodology for identifying discriminatory auto lending may be flawed. According to the Committee, because auto dealers are prohibited from collecting race and ethnicity data from borrowers, the CFPB has had to rely on a proxy method for determining if discriminatory lending has occurred. But the methodology used, Bayesian Improved Surname Geocoding, involves using borrowers’ names and geographic location to estimate their race and ethnicity – a methodology which, according to a study commissioned by the American Financial Services Association, overestimates minorities by as much as 41%.
In light of these concerns, Republicans introduced H.R. 1737 in April of this year. This bill would nullify Bulletin 2013-02 and direct the CFPB to take a more protracted and public approach to issuing guidance on indirect auto lending in the future. The bill passed the House on November 18, 2015 with a vote of 332-96 (with nearly half of Democrats voting in favor of the bill), and has been referred to the Senate Committee on Banking, Housing, and Urban Affairs.
The White House has indicated that it is strongly opposed to the changes proposed in H.R. 1737. But regardless of whether legislation is ultimately passed to curtail the CFPB’s regulation of auto finance practices, the bipartisan support for H.R. 1737 in the House, and the release of reports like the November 24th report from Republicans on the House Financial Services Committee, are undoubtedly adding pressure on the CFPB to consider whether, and how, it should change its policies on indirect auto financing. Stay tuned for further developments in this area.