The CFPB’s imposition of its auto lending guidelines, and use of its admittedly flawed proxy-methodology to determine discriminatory lending in auto finance, may come to an end under the GOP controlled White House and Senate.
The CFPB’s current guidance, published in a March 2013 Bulletin, has been largely criticized as limiting competition and increasing interest rates otherwise available to consumers. But the bulk of the criticism has been directed towards the CFPB’s methodology, which takes a borrower’s last name and address, and compares it to census data to create a rough determination of the race/ethnicity of that borrower. While the CFPB has acknowledged error rates in its methodology of around 20%, an independent, non-partisan review found that number to be closer to 41%. Despite knowing that its approach was error-prone and less accurate than other methods, the CFPB nevertheless relied on it to levy a total of approximately $124MM in remedial fines and $18MM in penalties against Ally Financial, Inc., American Honda Finance, and Toyota Motor Credit Corporation. In addition to the monetary fines, the CFPB required these auto lenders to alter their business practices and establish reporting/monitoring procedures.
In November 2015, the House of Representatives overwhelmingly, and with bi-partisan support, passed HR 1737, the Reforming CFPB Indirect Auto Financing Guidance Act, which would repeal the CFPB’s current guidance. While the companion measure was introduced in the Senate in March 2016, with hearings held a month later by the Committee on Banking, Housing, and Urban Affairs, it has not been brought to a committee vote. It is widely believed that President Obama, who opposes the measure, would veto the bill upon passage by the Senate.
With a Republican controlled White House and Senate, however, auto lenders and auto dealers are optimistic that the Senate measure will pass and the bill signed into law. If so, along with repealing the current guidance, the law would establish a transparent process the CFPB must follow in issuing subsequent auto finance guidance. Specifically, the process would require the CFPB to:
- provide a public notice and comment period before finalizing guidance on auto finance
- publicize its studies, data, methodologies, analyses and other information relied on in creating the guidance
- redact certain information exempt from disclosure under the Administrative Procedure Act
- consult with the Board of Governors of the Federal Reserve System, the Federal Trade Commission, and the Department of Justice
- perform a study on the costs and impact of the proposed guidance to consumers and women-owned, minority-owned, and small businesses
It is highly unlikely that the Senate measure will be brought to a vote before January 2017, which means the measure could become law sometime in the coming year.