Washington, D.C., USA: President Donald Trump today signed legislation that repeals auto lending guidance from the Consumer Financial Protection Bureau (CFPB), revoking a rule that was put in place in 2013 to protect minority customers from predatory practices.
The repealed guidelines issued by the CFPB outlined steps that lenders should take to address discrimination by auto dealers, who often determine the terms for car loans that they help facilitate for their customers.
Trump’s signature erases the CFPB’s guidance targeting “dealer markups,” the additional interest that is added to a customer’s third-party auto loan as compensation for the dealer. The CFPB took aim at dealer markups in 2013 during the Obama-era. Under former Director Richard Cordray (D), the CFPB warned auto dealers that the use of markups on third-party loans could lead to a lawsuit from the agency under anti-lending discrimination laws.
This repeal marks the first time that lawmakers have successfully used their authority under the Congressional Review Act to kill a regulatory action taken by an agency several years in the past, rather than within a brief window outlined by the 1996 law.
The congressional move was also novel because the law was used to take down regulatory guidance instead of a formal rule under the Administrative Procedure Act. Agencies issue informal guidance to advise businesses about how laws and rules are being implemented.
“This controversial abuse of the CRA should never have been allowed to happen in the first place,” said Amit Narang, regulatory policy advocate at Public Citizen. “By signing it, President Trump is turning his back on consumers by giving auto dealers license to discriminate against minorities.”
The CFPB policy seemed immune from repeal until last December, when the Government Accountability Office ruled that informal agency guidance could be repealed under the review law as if it were a formal rule. Sen. Pat Toomey (R-Pensylvania), who requested the analysis, introduced a resolution to repeal the auto lending guidance soon after.
Auto dealers, banks and their allies in Congress said the CFPB policy was an unfair and unfounded attack on an essential and harmless financing tool.
With the backing of auto dealers and lenders, Republicans who drove the rollback argued that the CFPB should have followed formal rulemaking procedures and sought more public feedback before issuing the guidelines. The 2010 Dodd-Frank law prohibits the bureau from regulating auto dealers. The CFPB guidance was addressed to lenders that fall under the bureau’s jurisdiction.
Obama-era CFPB and fair lending advocates pointed to several studies, including one that was conducted by the bureau, that found racial disparities in dealer markups. Those studies found that minority customers often paid higher dealer markups than white customers with similar credit profiles.
While the 2013 guidance was not a formal rule, the CFPB used the policy to launch a slew of lawsuits against automakers and lenders it said violated fair credit laws with discriminatory markups. The CFPB and Justice Department sued Ally Financial in December 2013 for close to $100 million in fines and damages, and also sued Honda and Toyota for tens of millions of dollars over similar charges.
Trump CFPB acting Director Mick Mulvaney – who also serves as the White House budget director – praised the move to rescind what he called a “misguided” initiative by his predecessor, who was appointed by former President Barack Obama.
Mick Mulvaney added that the agency will now reexamine how it enforces the Equal Credit Opportunity Act, which prohibits discrimination in lending.
“Given a recent 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, and in light of the fact that the Bureau is required by statute to enforce federal consumer financial laws consistently, the bureau will be reexamining the requirements of the ECOA,” the CFPB said in a press release.
Acting CFPB Director Mick Mulvaney also said that the agency is reviewing all previous guidance to determine if it should be submitted to Congress for review.
ECOA is a 1974 law that protects consumers from discrimination based on race, sex, age and other variables that have historically been used to prevent certain buyers from obtaining home loans. The CFPB referred to a 2015 Supreme Court decision, Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, as its reason for reexamining disparate impact. The decision said that disparate impact claims, under which a lender can be cited for unintentional discrimination, require that a plantiff prove a defendant’s policies caused the alleged disparity.
Mulvaney’s comments suggest the CFPB may make it harder for protected groups, including minorities and women, to claim they were adversely impacted by discriminatory practices. It marks the first time that the CFPB has signaled publicly that it plans to clarify the language of Regulation B, which is intended to prevent consumers from being discriminated against in any aspect of a credit transaction.
The CFPB also stated that it plans to submit all past guidance issued by the CFPB to Congress for review, a heady task given that the agency has issued guidance bulletins on a wide range of topics from credit card add-on fees to in-person collection practices.
“Today’s action also clarifies that a number of bureau guidance documents may be considered rules for purposes of the CRA, and therefore the Bureau must submit them for review by Congress,” said the CFPB. “The bureau welcomes such review, and will confer with Congressional staff and federal agency partners to identify appropriate documents for submission.”
Democrats and consumer watchdogs warned that, in addition to encouraging unfair lending practices, the rollback opened a whole new front in Republicans’ deregulation drive under Trump that would be felt well beyond the CFPB.
Republicans and a small group of Democrats voted to repeal the CFPB guidance under what is known as the Congressional Review Act (CRA). That law allows a simple majority of lawmakers in the House and Senate to vote to repeal a federal rule; it also bans the agency from replacing a rule with a similar measure in the future.
The resolution cleared the House earlier this month after clearing the Senate in April.
While Congress has used the CRA to repeal more than a dozen Obama-era federal rules since 2017, this is the first time that lawmakers have successfully overturned guidance from a federal agency that had not been finalized as a formal regulation.
The repeal of the guidance is the second Republican reversal of a key Cordray-era CFPB policy under the CRA. Trump signed a resolution last November that repealed the bureau’s rule on forced arbitration, issued in July 2017.
The rule had banned banks and credit card companies from forcing their customers into arbitration agreements that prevent those customers from joining class-action lawsuits.