Repeal of CFPB rule could still leave car lenders on the hook

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The financial services industry was poised for another regulatory relief victory Tuesday as the Senate closed in on overturning the Consumer Financial Protection Bureau's 2013 auto lending rules, but a central question is how lasting the measure will be in limiting the CFPB's authority.

Senators appeared to have necessary votes to use the Congressional Review Act to repeal 2013 CFPB guidance meant to stop discriminatory markups on indirect loans made by car dealers. A motion passed 50-47, largely along party lines, to proceed to a formal debate. A final vote could come as early as Tuesday evening.

The Congressional Review Act typically allows 60 legislative session days from when a rule is submitted for lawmakers to consider a repeal, yet senators employed a new tactic for reversing a five-year-old policy.

But some observers said overturning the rule, which the CFPB had intended to issue as guidance, does little to prevent a future CFPB director from still aggressively targeting individual lenders via the agency's massive enforcement authority.

"This vote has a largely symbolic character to it," said J.W. Verret, an associate law professor at George Mason University. "Even if the CRA goes through and the guidance is repealed, what happens under the next director? Who knows what the dynamics in Congress would be at that point."

The Congressional Review Act has enjoyed somewhat of a heyday under the Trump administration. Previously, Congress repealed the CFPB's mandatory arbitration rule. But lawmakers have taken the law further with the indirect auto lending rule and other pending measures by getting the Government Accountability Office to define previously issued guidance as rules. That resets the window for lawmakers to unwind much older policies.

"This is an attempt to use the Congressional Review Act in a brand-new way, to target guidances that were not reported as rules when they were issued and therefore, the argument goes, didn't start their clocks, leaving them still eligible to CRA resolution years later," said Philip Wallach, a senior fellow of governance at the R Street Institute, a nonpartisan public policy research group.

A repeal of the auto lending rules also raises questions about whether auto lenders that paid big fines — including Ally Financial, Toyota Motor Credit Corp. and Honda Finance Corp. — would seek remedial action or sue the agency to claw back money from their settlements.

Ally Financial said it is monitoring the bill but has no additional comment.

But Verret said a repeal could spark a backlash against auto lenders the next time a Democrat is named to lead the agency under a future administration. For one thing, the congressional resolution does not affect the CFPB's authority under the Equal Credit Opportunity Act, which the agency had cited in its original guidance.

"The next [Democratic] CFPB director could bring enforcement actions grounded in the guidance even if it was repealed," Verret said. "Guidance is just an indication by an agency of the type of enforcement actions they can bring, and the CRA vote does not limit the CFPB's enforcement authority."

But others disagreed, saying a repeal of the auto lending guidance could have a chilling effect not just on the CFPB but also on other regulators enforcing civil rights laws in consumer finance.

"What they really want to do is overturn the Equal Credit Opportunity Act and all the case law that has supported that over decades, not the voluntary guidance bulletin," said Christopher Peterson, a senior fellow at the Consumer Federation of America and a University of Utah law professor. "Jim Crow is alive and well today in our financial services market."

The Government Accountability Office put the Congressional Review Act measure in motion when it issued a report last year, in response to a letter from Sen. Pat Toomey, R-Pa., determining that the CFPB's controversial guidance constituted a rule and therefore should have been submitted to Congress in 2013 for review.

The GAO report effectively scrapped the guidance and set the clock ticking on a CRA repeal, which reset in January with a new congressional session.

Peterson, a former CFPB special adviser, said when then-CFPB Director Richard Cordray issued the guidance bulletin in 2013, he was describing the agency's expectations that auto lenders be aware of existing requirements under the Equal Credit Opportunity Act. That law, passed in 1974, makes it illegal to discriminate in any credit transaction, including auto dealer markups on loans to minority borrowers regardless of their creditworthiness.

But critics argued that the CFPB was engaging in regulation by enforcement. A powerful constituency, auto dealerships, were outraged at the guidance because the CFPB was prohibited by statute from regulating auto dealers.

Senate Majority Leader Mitch McConnell, R-Ky., on Tuesday called the guidance a “brazen attempt” by Cordray to “stretch his authority and interfere in the auto industry.”

“And now, Congress will have its say,” McConnell said. “Republicans are chopping away at the tangled mess of regulations the last administration left behind.”

But Sen. Elizabeth Warren, D-Mass., the CFPB's original architect, said the congressional measure is an attack on fair-lending policies.

“A vote in favor of the resolution today is a vote to support the Trump administration’s systematic dismantling of fair-lending laws in this country,” Warren said. “It’s a vote in favor of allowing some auto lenders and dealers to continue charging African-Americans and Latinos hundreds, even thousands more just because of their race.”

Last year, Republican members of the House Financial Services Committee released a report and documents that alleged Cordray "may have violated federal law," by using a "suspect legal theory and flawed statistical methodology" to extract the settlements from auto lenders.

Consumer groups now are advising consumers to shop for auto loans from credit unions or banks to protect themselves from auto dealership markups that may inflate the price of car loans, Peterson said.

Amit Narang, a regulatory policy advocate at Public Citizen, said the Senate was "opening a Pandora's box" in using the CRA to attack guidance that is five years old.

Republicans did not have the votes to overturn the 2013 guidance at the time, and instead waited until they had a majority in the Senate to do so. "It would have been appropriate to request the GAO opinion back in 2013 when the guidance was issued, but they didn't have the votes," Narang said.

Once a regulation has been repealed under the CRA, Congress would have to pass another law with 60 votes to bring the repealed regulation back to life. The review act also prohibits the CFPB from adopting any future regulation that is substantially similar to the one Congress repealed.

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Auto lending Regulatory relief Regulatory guidance Congressional Review Act Pat Toomey Richard Cordray Elizabeth Warren CFPB