A bipartisan bill, House Resolution 1737, which the U.S. House of Representatives will be voting on this week, seeks to nullify the Consumer Financial Protection Bureau’s (CFPB’s) guidance to indirect auto lenders. Specifically, the goal of the legislation is to: (1) impose a public notice and comment period prior to issuing the final guidance; (2) require the CFPB to publish all studies and data used in reaching the guidance; and (3) conduct a study on the costs and impacts of the guidance to consumers and women-owned, minority-owned, and small businesses.
In March of 2013, the CFPB released a bulletin to provide guidance to indirect auto lenders and dealers to comply with the fair lending requirements of the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B. A consumer seeking financing to purchase a car can obtain it directly from the auto dealer, or the dealer may facilitate financing options for the buyer with a third-party indirect auto lender such as a depository institution, a nonbank affiliate of a depository institution, an independent nonbank, or an auto lender with a primary purpose to finance purchases for a particular automobile manufacturer. The auto dealer collects the purchaser’s information and uses an automated system to shop around for prospective indirect auto lenders. Each indirect auto lender provides the dealer with a minimum interest rate under which the lender would consummate the transaction. In some instances, the indirect auto lender may adjust the rate, employ underwriting exceptions, or modify other terms and conditions of financing based upon negotiations between the dealer and the indirect auto lender. Along those lines, the dealer may adjust the interest rate in order to receive what is called “reserve” from the indirect lender, essentially compensation to the dealer for originating loans. Dealer reserves often allow the auto dealers to discount rates for their customers. This system also streamlines the financing process by eliciting multiple rate quotes for the purchaser from various prospective lenders.
The CFPB guidance applies to both depository and nonbank institutions. The CFPB implemented the guidance because the incentives under some auto lender policies and the discretion allowed under these policies could pose a risk of resulting pricing disparities on the basis of race, national origin and other prohibited bases, and in violation of the ECOA. The CFPB suggested that auto lenders compensate dealers with nonnegotiable payments, such as flat fees.
Supporters of the House Resolution claim that passing this bill would help create transparency at the CFPB and help continue to make auto credit available to and affordable for customers. Without curbing the CFPB’s sole authority on this issue, H.R.1737 supporters believe competition will be reduced and credit costs increased. The elimination of flexible discounts to buyers would actually hurt the consumers the CFPB was tasked to protect. Also, supporters of H.R. 1737 have a problem with the method by which the CFPB issued its guidance in the first place: behind closed doors and without public comment or transparency.
Supporters of the CFPB’s approach are speaking out against the upcoming bill and released a letter to legislators on Tuesday. The bill opponents noted that the CFPB was the first and only regulator to address this type of discrimination and the underlying cause, dealer interest rate markups. The bill opponents highlighted the Center for Responsible Lending estimation that consumers taking out car loans in 2009 would pay $25.8 billion in additional interest over the lives of their loans specifically tied to these markups. The letter noted that pricing discretion leads to discrimination and the CFPB’s enforcement work with the Department of Justice had already netted roughly $176 million in restitution and penalties against lenders.
With the outcome to be decided this week, auto lenders need to keep a close eye on compliance requirements for their lending activities. The bill, however, has much bipartisan support with 126 co-sponsors and passed the House Financial Services Committee by a vote of 47-10. The CFPB may lose this battle, but it is unlikely to weaken its ability to influence the consumer financial product marketplace. Expect a vote this week and we will keep you informed of any new developments.