United States

CFPB guidance on indirect auto lending subject to Congressional review


In March 2013, the Consumer Financial Protection Bureau (CFPB) issued guidance on fair lending compliance for indirect auto lenders regarding the practice known as “dealer markups” – instances in which an auto dealer charges a higher interest rate than the rate an indirect lender will purchase the auto installment contract for. These higher rates, often determined by the auto dealer under its discretion, result in an increased share of compensation for the dealer for each contract. Under the guidance, an indirect auto lender could be held liable under Equal Credit Opportunity Act (ECOA) principles for pricing disparities on a prohibited basis which result from these markups, as considered under a disparate treatment or disparate impact theory. The guidance indicated that a lender’s limited liability under ECOA for another creditor’s violations would not necessarily protect an indirect lender when disparities on the part of the dealership resulted from the indirect lender’s permitted markup and compensation policies. As a result, the CFPB guidance suggested that indirect lenders limit their fair lending risk by imposing controls and implementing ongoing monitoring of dealer markup and compensation policies, or eliminating dealer discretion altogether by implementing a different method of payment, such as a flat fee per contract.

On Dec. 5, 2017, the Government Accountability Office (GAO) issued a decision that determined that the 2013 CFPB guidance was a “rule” subject to the Congressional Review Act (CRA), as it determined that it involved “a general statement of policy designed to assist indirect auto lenders to ensure they are operating in compliance with [the] ECOA, as applied to dealer markup and compensation policies.” A “rule” subject to the CRA is required to be submitted prior to taking effect to Congress and the Comptroller General. Because the CFPB did not consider this guidance to be a rule subject to the CRA, it did not go through the required submission process. As a result, the guidance is essentially ineffective unless resubmitted through official channels.

As a result, the guidance could be repealed under the CRA process by Congress using a method known as the joint resolution of disapproval, which requires a simple majority vote and then presentment to the president for executive action. If approved, the rule could not be reenacted in similar form unless explicitly authorized by law enacted after the date of the initial disapproval resolution, with the current guidance essentially rendered ineffective and void.

The effect of this decision has potentially father-reaching effects than just the regulation of auto dealer pricing, as other guidance provided by the CFPB could now be challenged for similar scrutiny under the CRA.