On Tuesday, December 5, 2017, the Government Accountability Office ("GAO") levelled a heavy blow on a major regulatory initiative of the Consumer Financial Protection Bureau ("CFPB"): its highly controversial "disparate impact" discrimination theories as applied to pricing in the indirect automobile financing industry. The specific GAO ruling finds that a 2013 "Bulletin" stating the CFPB's interpretation of the Equal Credit Opportunity Act ("ECOA") as applied to indirect automobile lending should have been issued as a rule and hence be subject to Congressional review. Under the ruling, the CFPB should have transmitted the Bulletin to Congress for evaluation, but failed to do so.
The GAO's conclusion that the guidance qualifies as a rule means that the Bulletin must be re-submitted to Congress for review in order for it to become effective. As a result, the Bulletin can no longer be used by government examiners. Given the shift in control of the CFPB to a Trump appointee, chances seem slim that the CFPB would reissue the guidance. Hence, by its narrow finding, the GAO appears to have dealt the Bulletin a death blow.
In March 2013, the Bureau issued CFPB Bulletin 2013-02 to target dealer markups, a practice where an automobile dealer charges a consumer a higher interest rate than the rate by which an indirect lender is willing to purchase the consumer's retail installment sales contract. The CFPB expressed concern that dealers were being allowed by the indirect lenders to exercise too much pricing discretion, opening the door to discrimination. In the Bulletin, the CFPB contended that it was "likely" to consider an indirect auto lender a "creditor" within the meaning of ECOA, if an indirect lender purchased a contract at an interest rate lower than the rate on the consumer's contract. The Bureau also announced that it intended to use a disparate treatment or disparate impact theory to examine an indirect auto lender's ECOA liability for prohibited pricing differences created by the dealer's pricing activities. Under this view, indirect lenders would have liability for disparate pricing – even though they did not set the pricing and even without evidence that either the lender or the dealer intended to discriminate against anyone. The Bureau's guidance has had considerable implications for financial institutions, as banks and lenders have seen significant increase in the cost of compliance, not to mention numerous and expensive investigations and settlements with the CFPB, banking regulators, and the U.S. Department of Justice.
The Bulletin has long been the subject of controversy, as many indirect lenders contended that they should not be penalized for unintentional discrimination by dealers. Many also attacked the methodology used to prove disparate impact. In March 2017, Senator Pat Toomey (R-PA) asked the GAO, Congress' investigative wing, to determine whether the financial guidance issued by the Bureau in 2013 qualified as a "rule." The GAO concluded that the guidance did qualify as a rule, even though Bulletin 2013-02 is not legally binding. Specifically, the GAO found that:
The Bulletin provides information on the manner in which the CFPB plans to exercise its discretionary enforcement power. It expresses the agency's views that certain indirect auto lending activities may trigger liability under ECOA. For example, it states that an indirect auto lender's own markup and compensation policies may trigger liability under ECOA if they result in credit pricing disparities on a prohibited basis, such as race or national origin. It also informs indirect auto lenders that they may be liable under ECOA if a dealer's practices result in unexplained pricing disparities on prohibited bases where the lender may have known or had reasonable notice of a dealer's discriminatory conduct. In sum, the Bulletin advised the public prospectively of the manner in which the CFPB proposes to exercise its discretionary enforcement power and fits squarely within the Supreme Court's definition of a statement of policy.
In conclusion, the GAO found that the Bulletin was subject to the requirements of the Congressional Review Act because it served as "a general statement of policy 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."
The GAO's decision renders the Bulletin a nullity until the CFPB properly submits the measure to Congress. Bank examiners, and CFPB examination and enforcement personnel, cannot rely on the Bulletin to guide their supervisory and enforcement activity. Once the CFPB submits the rule – if ever – then Congress is free to challenge the rule under the Congressional Review Act.
"GAO's decision makes clear that the CFPB's back-door effort to regulate auto loans, which was based on a dubious legal justification, did not comply with the Congressional Review Act," said Senator Toomey in a statement. "GAO's decision is an important reminder that agencies have a responsibility to live up to their obligations under the law. When they don't, Congress should hold them accountable. I intend to do everything in my power to repeal this ill-conceived rule using the Congressional Review Act."
However, it is doubtful that the measure will ever make its way to Congress. Under the leadership of Acting Director Mick Mulvaney, it is highly unlikely that the CFPB will work to revive the rule. The Bulletin has long been vilified by many Republicans, as well as some Democrats. In 2015, the House of Representatives passed a bill that would have eliminated the Bulletin, though the measure was not taken up by the Senate.
Troutman Sanders routinely advises clients on the compliance risks posed by direct and indirect auto lending. We will continue to monitor these regulatory developments.
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