On Wednesday, the U.S. House of Representatives passed H.R. 1737 (“Reforming CFPB Indirect Auto Financing Guidance Act”), designed to repeal the CFPB’s March 2013 bulletin covering indirect auto finance. The Bill “declares without force or effect Consumer Financial Protection Bureau (CFPB) Bulletin 2013-02 (Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act), published March 21, 2013” and “amends the Consumer Financial Protection Act of 2010 to direct the CFPB, when proposing and issuing guidance primarily related to indirect auto financing, to: provide for a public notice and comment period before issuing the guidance in final form; make publicly available all information relied on by the CFPB; redact any information exempt from disclosure under the Freedom of Information Act; consult with the Board of Governors of the Federal Reserve System, the Federal Trade Commission, and the Department of Justice; and study the costs and impacts of the guidance to consumers and women-owned, minority-owned, and small businesses. The Committee Report from the Committee on Financial Services sets forth the background and need for the legislation.
Bulletin 2013-02 provides guidance to indirect auto lenders regarding fair lending risk under the Equal Credit Opportunity Act (ECOA). While this bulletin does not purport to offer guidance to auto dealers, which are explicitly exempted from CFPB regulation under the Dodd-Frank Wall Street Reform and Consumer Protection Act, it nevertheless raises significant concerns that the CFPB is flouting this statutory limitation because the bulletin’s practical effect is to regulate dealers. Furthermore, the bulletin raises concerns among auto lenders because it asserts that ECOA allows for a “disparate impact” theory of liability in which a lender may be held liable for discrimination where a facially neutral lending practice disparately impacts minority borrowers, even where the lender did not intend to discriminate against them. The bulletin advises that, in order to avoid liability under ECOA, financial institutions having indirect lender relationships with auto dealers should either impose controls on dealer compensation policies or forbid dealers from charging retail interest rates on consumer auto loans altogether. Although the CFPB maintains that its bulletins are non-binding guidance, it is simultaneously aware that such guidance must be taken seriously by market participants, because just the cost of being subjected to a CFPB investigation, even if it does not result in a CFPB enforcement action, is enormous. Accordingly, the bulletin is tantamount to regulation, except without public notice or opportunity for comment. By issuing guidance which it knows will induce actionable reliance, the Bureau attempted to force lenders to require dealers to adopt a “flat fee” compensation model. In doing so, the Bureau seeks to regulate companies over which it has no statutory authority, and without even providing the due process afforded regulated companies under the Administrative Procedure Act. What makes the CFPB’s apparent disregard of its jurisdictional limitations even more problematic is the weakness of its statistical “proof” that auto dealers have engaged in discriminatory lending. First, the CFPB does not have verifiable evidence that borrowers are minorities or other protected classes–it is illegal for auto dealers to collect such information. The CFPB “determined” borrowers’ race, ethnicity, and gender, among other factors, by reviewing their names and making conclusions using Bayesian probability, also known as a“proxy methodology”–in other words, the CFPB made what it believed to be good guesses based on a number of assumptions. Second, the extension of disparate impact theory, which began in employment discrimination cases and was later applied to housing discrimination cases, is problematic in the context of ECOA and auto lending. The theory requires one to assume that any statistically significant difference in interest rates paid by borrowers of different races, genders, or other protected characteristics must be the result of discrimination. However, there potentially exist a number of nondiscriminatory explanations for certain groups paying higher interest rates than others–for example, different car model preferences, dealership locations, socio-economic factors, and financial sophistication. On June 20, 2013, 35 Members of the House of Representatives wrote the CFPB seeking “all studies, analysis, and information it relied upon in developing its guidance document” and “the full set of details concerning its disparate impact methodology,” including the proxies it used, the factors held constant, the metric used to measure pricing disparities, and the numerical threshold at which a pricing disparity constitutes an ECOA violation. Over a year later, and only after continuous pressure from Congress and industry stakeholders, the CFPB released a white paper detailing its disparate impact methodology for ascertaining fair lending liability for indirect auto lenders.3 The white paper described the CFPB’s methodology for assessing disparate impact liability. The CFPB’s methodology has drawn significant criticism, including by the American Financial Services Association, which commissioned Charles River Associates (CRA) to review the Bureau’s white paper. The CRA study, which was released on November 19, 2014, found significant flaws in the CFPB’s proxy methodology. Based on 8.2 million vehicle contracts originated in 2012 and 2013, the study showed that the CFPB’s proxy method overestimates minorities by as much as 41 percent, which calls into question the reliability of the CFPB’s results. On the heels of the publication of the CRA study, industry stakeholders vociferously called for the CFPB to review its testing methodology, correct any errant bias, and release the findings of its revised methodology for public review before pursuing further action on the matter.
The Obama Administration opposed the bill before passage: https://www.whitehouse.gov/sites/default/files/omb/legislative/sap/114/saphr1737h_20151116.pdf