As we reported recently, the Government Accountability Office has determined that CFPB Bulletin 2013-02 on dealer pricing in indirect auto finance (“Dealer Pricing Bulletin” or “Bulletin”) is a “rule” subject to review under the Congressional Review Act (“CRA”). We noted that, if Congress chose to disapprove the guidance, it would severely undermine the basis for any future enforcement or supervisory action based on the legal and factual theories set forth in the Bulletin.
Our friend Professor Adam Levitin at Georgetown Law Center sent one of us the following message on Twitter a few days ago, questioning whether such an override would have any impact at all:
@AlanKaplinsky Trying to puzzle through this. It’s pretty weird. GAO’s determined that the IAL [indirect auto lending] guidance is subject to CRA. But as far as I can tell, the GAO decision has no force of law, and I don’t see how it could, as the CRA says it’s not subject to judicial review. If it isn’t actually a “rule,” then a CRA disapproval resolution would have no effect. But there’s no judicial review allowed to determine this. And even if it is a rule, what would it mean to void non-binding guidance? It doesn’t void or change the CFPB’s position or undercut any ECOA or UDAAP suit the CFPB might bring. All it does it void the guidance communicating the CFPB’s position. IAC, does it really matter? Perhaps the CFPB will stop enforcement actions for a while, but the IAL consent decrees presumably have forward looking provisions, and there’s also state AG enforcement risk. I can’t imagine compliance at most IALs letting them revert to old form. And given the 5-year SOL on ECOA, even if a Trump confirmed CFPB Director had no interest in bringing ECOA actions, any reversion to old behavior will quickly become chargeable by the AG in the next administration or the CFPB Director after a Trump-confirmed one. It’s possible that that AG and CFPB Director won’t be interested in pursuing ECOA actions, but if they are, a[n] IAL that reverted to allowing unpoliced markups would be in a most uncomfortable position. A lot of risk for a few years of allowing unpoliced markups. (emphasis added).
There is much that can (and ultimately may) be said in response to each of these assertions, but given the likelihood of a joint resolution of disapproval being introduced shortly, we wanted to focus today on the suggestion that the enactment of a disapproval measure would be inconsequential. More specifically, we wanted to take the opportunity to explain why, as suggested in our blog post, we believe an override of the Dealer Pricing Bulletin should put a permanent end to this theory of assignee liability for so-called dealer “markup” disparities and make it impossible for the CFPB to pursue supervisory or enforcement actions based upon it.
Let’s begin by remembering that the legal and factual theories on which the CFPB’s indirect auto fair lending cases were based are very shaky, to say the least. We wrote a blog post about this a couple of years ago, but just to refresh your recollection:
- There is a significant question, especially after Inclusive Communities, about whether disparate impact claims are cognizable under the Equal Credit Opportunity Act in the first place (see “The ECOA Discrimination and Disparate Impact – Interpreting the Meaning of the Words that Actually Are There,” 61 Business Lawyer 829 (2006));
- The Supreme Court decision in Dukes v. Wal-Mart stands for the proposition that a policy of “allowing discretion” is not a specific, identifiable policy subject to disparate impact analysis (see “Auto Finance and Disparate Impact: Substantive Lessons Learned from Class Certification Decisions”);
- The Regulation B multiple creditor liability rule (12 C.F.R. § 1002.2(l)) provides that an assignee (i.e., an “indirect auto finance company” in the parlance of the Bureau) is not liable for an ECOA violation by the original creditor unless the assignee knew or had reasonable notice of the act, policy or practice constituting the violation before becoming involved in the credit transaction – meaning in our view that the government should need to prove that the assignee knew or had reasonable notice of disparate treatment by a dealership prior to purchasing a retail installment sale contract (“RISC”);
- The legal theory on which the discrimination claim ultimately is based – that discretionary pricing by dealerships has a discriminatory effect due to disparate treatment by dealerships – would require a dealer-level analysis rather than a portfolio-wide one;
- The use of a portfolio-wide analysis manufactures statistical evidence of discrimination that does not exist by aggregating the RISCs of different dealerships to the assignee level, thereby comparing different auto dealers to one another; and
- The use of a continuous-regression model over BISG proxy results creates the appearance of disparities when none exist, and inflates any that may exist.
In subsequent blogs posts, we discussed reports prepared by the House Financial Services Committee Majority Staff titled “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending” and “Unsafe at Any Bureaucracy, Part III: The CFPB’s Vitiated Legal Case Against Auto Lenders.” We also reported previously on the AFSA study titled “Fair Lending: Implications for the Indirect Auto Finance Market,”an Executive Summary of which is available here. In short, the subject of alleged assignee liability for asserted dealer “mark-up” disparities has been highly controversial and a lightning rod for Congressional, media and industry criticism of the Bureau.
Now let’s assume for the moment that Congress enacts a joint resolution disapproving the Dealer Pricing Bulletin articulating the Bureau’s theories of assignee liability for so-called dealer “markup” disparities, and the President of the United States signs it into law. In that event, we believe that it should become impossible for a federal governmental agency to pursue the theory of liability in enforcement and, therefore, anywhere else. We further believe that such a Congressional override would cause the federal judiciary to be even more hostile to the CFPB’s theory of liability than Supreme Court decisions like Wal-Mart and Inclusive Communities would require. Here’s why.
The salient question is, “what would be the import of the enactment of a joint resolution of disapproval?” A Congressional override of the guidance would not represent, as Professor Levitin suggests, merely a disapproval of the agency’s statement of its position. It is, rather, a disapproval of the position itself pursuant to a law enacted by the democratically-elected representatives of the People of the United States declaring that “such rule shall have no force and effect.” The “position” is embodied in the “statement” and cannot be disassociated from it; they are indivisible.
The end result of the legislative process thus would be a Public Law effectively branding this theory of liability as, in the parlance of Inclusive Communities, a disparate impact claim that is “abusive” of sales finance companies and banks engaged in the automobile sales finance business. (Inclusive Communities emphasized the importance of safeguards against disparate impact claims that are abusive of defendants, such as the requirement to identify a specific policy or practice of the defendant causing asserted statistical disparities, and directed district courts to enforce this “robust causality requirement” promptly by “examin[ing] with care whether a plaintiff has made out a prima facie case of disparate impact” by “alleg[ing] facts at the pleading stage or produc[ing] evidencing demonstrat[ing] a causal connection” between the alleged policy and the disparity.)
Pursuant to the CRA, the enactment of a disapproval measure would preclude the CFPB from subsequently reissuing the rule or adopting a new rule that is substantially the same as the disapproved rule unless “the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.”
If the CFPB’s “rule,” as expressed in its Dealer Pricing Bulletin, is invalid, and the CFPB cannot issue a similar rule in the future, how can it possibly turn around and apply the disapproved “rule” in supervision and enforcement? We don’t believe it can because doing so would disregard the clear import of an act of Congress. Rather, we are confident that a Court would conclude that the Congressional override is an expression of disapproval of the legal and factual theories of liability expressed in the Bulletin.
By Professor Levitin’s logic, even though Congress nullified the CFPB arbitration agreements rule, the CFPB would be free to commence UDAAP enforcement actions or administrative proceedings against companies simply for using arbitration agreements with class action waivers, even though the rule prohibiting them was invalidated. We think this result not only would defy the Canon of Common Sense, but it also would fail to give effect to the will of the People as reflected in an act of Congress that was approved by the President of the United States.
In Professor’s Levitin’s formulation, an administrative agency can continue to apply, in the enforcement (and apparently in the supervisory) contexts, the substance of a “rule” that has been disapproved by an act of Congress. We respectfully disagree. This being a representative Democracy in which the government is subordinated to the will of the People as expressed in laws enacted by their elected representatives, we think it makes common sense to answer the salient question in the manner we suggest, rather than in a manner that leaves an agency free to do as it pleases, insulated from the clear import of what Congress (and derivatively the People) have instructed by enacting a disapproval measure into law. We thus urge Congress to disapprove CFPB Bulletin 2013-02, because we believe that congressional disapproval should have a permanent preclusive effect on the ability of federal regulators to pursue this deeply flawed theory of liability.
We do not appear to be alone in this view. Professor Levitin himself, in testimony submitted to the House Financial Services Committee in 2015, noted that a provision of the Financial CHOICE Act that would repeal the Dealer Pricing Bulletin would “shield discriminatory lenders from legal repercussions.” Although we would eliminate the word “discriminatory” from that sentence, we believe that a CRA override of the Dealer Pricing Bulletin would have that effect. Suggesting that the CFPB could pursue these cases against “indirect auto lenders” after a Congressional override of the Bulletin strikes us as wishful thinking.