The Senate voted on Tuesday to exempt auto loans from Consumer Financial Protection Bureau guidance intended to root out discriminatory lending practices. The bigger picture: the affirmative, 51-47 vote will also give legislators greater ability to unleash the Congressional Review Act as a regulation-killing weapon.
The 2013 bulletin issued by the CFPB alleges that potentially discriminatory markups in auto lending may result in tens of millions of dollars in consumer harm each year.
When consumers finance automobile purchases from an auto dealership, the dealer often facilitates indirect financing through a third-party lender, the CFPB explained. Indirect auto lenders often allow the dealer to charge the consumer an interest rate that is costlier for the consumer than the rate the lender gave the dealer. This increase is typically called “dealer markup” and the lender shares part of the revenue from that increased interest rate with the dealer.
“As a result, markups generate compensation for dealers while frequently giving them the discretion to charge consumers different rates regardless of consumer credit worthiness,” the CFPB wrote. “Lender policies that provide dealers with this type of discretion increase the risk of pricing disparities among consumers based on race, national origin, and potentially other prohibited bases.”
The CFPB recommended that indirect auto lenders monitor and address the effects of markup policies as part of a fair lending compliance programs, while eliminating dealer discretion to markup buy rates.
Republicans in Congress, never reluctant to heap upon CFPB criticisms, found plenty to dislike about the guidance. It played into growing criticism that regulatory agencies were using guidance as de facto rulemaking, absent the public debate and cost-benefit analysis demanded by the Administrative Procedures Act. Another fundamental complaint painted a picture of research the Bureau did prior to issuing the rule as “junk science.” That research into loan data, critics said, did little more than guess at the ethnicity of subjects in the data pool based on last name and zip codes.
GOP Sens. Pat Toomey (R-Pa.) and Jerry Moran (R-Kan.) sponsored the bill, which will undo what they termed an “overstep” by the Bureau.
Their account of the guidance is that the Dodd-Frank Act, when creating the CFPB, specifically prohibited the new agency from regulating auto dealers. However, in 2013 the CFPB found a way around the ban. Without going through the customary rulemaking and public input processes, the CFPB published a "bulletin" that threatens auto dealers' ability to negotiate the terms of these loans with their customers and has been used to sanction auto financing companies.
“An ill-advised Obama-era auto-lending rule issued by the CFPB missed the mark on both process and substance," Moran said in a statement. “This resolution of disapproval provides Congress the opportunity to reverse this overreaching rule to return a sense of stability to the auto marketplace.”
At Toomey’s request last year, the Government Accountability Office reviewed the CFPB's guidance and concluded that it could be considered a rule for purposes of the CRA, and could be rolled back by simple majority vote in Congress regardless of the date it was enacted.
The Congressional Review Act was enacted in 1996 to strengthen congressional oversight of agency rulemaking. It requires all federal agencies, including independent regulatory agencies, to submit a report on each new rule to both Houses of Congress and to the Comptroller General before it can take effect. The law provides a 60-day period following agency publication of a regulation during which a majority vote can undo implementation. Once rules are scrapped via the CRA, agencies are prohibited from issuing “substantially similar” rules to be enacted.
“Because the CFPB did not send a report on the Bulletin to Congress or the Comptroller General because, as stated in their letter to our Office, in their opinion the Bulletin is not a rule under CRA,” the GAO ruling says. “We decided that the Interagency Guidance fell squarely within CRA as an agency action that constituted a ‘statement of general applicability and future effect designed to implement, interpret or prescribe policy.’”
Congress recently used the once largely unused law to rescind the Securities and Exchange Commission’s rule requiring oil, gas, and mining companies to disclose payments made to governments for extraction rights. Other Dodd-Frank Act rules suffered a similar fate.
Sen. Sherrod Brown (D-Ohio), ranking member of the Senate banking Committee, is among those fighting against the application of the CRA.
“Republicans in this Congress have made it pretty clear to the American people whose side they’re on,” he said on the Senate floor. “They have used the Congressional Review Act more than any other Congress in history to give handouts to big corporations at the expense of ordinary Americans.”
Republicans, he said, have used the CRA to repeal a deep slate of Obama-era rules.
“Fortunately, too much time has passed for Congress to use the Congressional Review Act to roll back any more protections the last administration put in place,” Brown said. “Unfortunately, they now want to use a legal loophole to interfere with thousands more federal decisions, potentially going back more than two decades. … There would be no limit to the types of agency actions they could target, and these attacks could continue to come to the Senate floor for months or years.”