According to a Politico report, CFPB Acting Director Mick Mulvaney, speaking at a Washington, D.C. event, commented on changes to the Bureau’s approach to bringing enforcement actions and the Bureau’s plans to review the use of the disparate impact theory of ECOA liability.

With regard to enforcement actions, Mr. Mulvaney is reported to have indicated that the Bureau plans to consider the scale and frequency of violations when deciding whether to bring an enforcement action against a company.  According to Politico, Mr. Mulvaney suggested that he might view a company’s violations as unintentional, and thus exercise his discretion not to take enforcement action, where the number of transactions that involve violations is a small fraction of the company’s total transactions.

While Mr. Mulvaney’s comments appear to have been directed to the CFPB’s decision to bring an enforcement action, it seems likely he would take a similar approach to the CFPB’s assessment of civil penalties in supervisory actions.  Among the factors listed in the matrix for assessing civil penalties used by OCC examiners is the duration and frequency of a bank’s violations before it was notified by the OCC of the violations.  This factor includes an evaluation of “the relationship of the number of instances of conduct to the bank’s total activity.”  In its RFI on its enforcement processes, the CFPB seeks comment on whether it should adopt a civil penalty matrix for determining the amount of civil penalties.

Politico also reported that Mr. Mulvaney indicated that, as a result of Congress’s override of the CFPB bulletin concerning discretionary pricing by auto dealers, the CFPB is reviewing the application of the disparate impact theory under the ECOA.  Although the bulletin set forth the CFPB’s disparate impact theory of assignee liability for so-called auto dealer “markup” disparities, Mr. Mulvaney is reported to have indicated that the Bureau’s review is not limited to the auto finance context and instead will look at the Bureau’s overall approach to ECOA liability.  His comments appear to be consistent with the statement issued by the CFPB following President Trump’s signing of the joint resolution overriding the CFPB bulletin in which the CFPB indicated that it would be reexamining ECOA requirements in light of “a recent Supreme Court decision distinguishing between antidiscrimination statutes that refer to the consequences of actions and those that refer only to the intent of the actor” and “the fact that the Bureau is required by statute to enforce federal consumer financial laws consistently.”

 

 

 

Yesterday afternoon, President Trump signed into law S.J. Res. 57, the joint resolution under the Congressional Review Act (CRA) that disapproves the CFPB’s Bulletin 2013-2 regarding “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act.”  The Government Accountability Office had determined that the Bulletin, which set forth the CFPB’s disparate impact theory of assignee liability for so-called auto dealer “markup” disparities, was a “rule” subject to override under the CRA.

The joint resolution was passed by the Senate in April 2018 by a vote of 51 to 27 and by the House earlier this month by a vote of 234 to 175.  We recently shared our thoughts on the implications of Congressional disapproval.

The CFPB issued a statement about the signing that included a statement from Acting Director Mulvaney that referred to the Bulletin as an “initiative that the previous leadership at the Bureau pursued [that] seemed like a solution in search of a problem.”  Mr. Mulvaney said that “those actions were misguided, and the Congress has corrected them.”

The CFPB stated that the resolution’s enactment “does more than just undo the Bureau’s guidance on indirect auto lending.  It also prohibits the Bureau from ever reissuing a substantially similar rule unless specifically authorized to do so by law.”  Most significantly, the CFPB indicated that it “will be reexamining the requirements of the ECOA” in light of “a recent Supreme Court decision distinguishing between antidiscrimination statutes that refer to the consequences of actions and those that refer only to the intent of the actor” and “the fact that the Bureau is required by statute to enforce federal consumer financial laws consistently.”

This is presumably a reference to the Supreme Court decision in Inclusive Communities and the fact that the ECOA discrimination proscription does not proscribe discriminatory effects but, rather, speaks solely in terms of discrimination “against any applicant on the basis of” race, national origin and other prohibited bases.  As we have observed previously, the basis for the Inclusive Communities holding with respect to the FHA, which is summarized at the end of Section II of the majority opinion, highlights material differences between the FHA and the ECOA.  The distinctions between discrimination statutes that refer to the consequences of actions and those that do not is illustrated vividly by a textual juxtaposition chart that appeared in the House Financial Services Committee Majority Staff Report titled “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending.”  The Business Lawyer article cited in that report, “The ECOA Discrimination Proscription and Disparate Impact – Interpreting the Meaning of the Words that Actually Are There,” discusses this issue in further detail.  The CFPB’s plans to reexamine ECOA requirements could represent an overture to reviewing references to the effects test in Regulation B (which implements the ECOA) and the Regulation B Commentary.

With regard to the Bulletin’s status as the first guidance document to be disapproved pursuant to the CRA, the CFPB commented that the resolution’s enactment “clarifies that a number of Bureau guidance documents may be considered rules for purposes of the CRA, and therefore the Bureau must submit them for review by Congress.”  The CFPB indicated that it plans to “confer with Congressional staff and federal agency partners to identify appropriate documents for submission.”

 

 

 

 

 

We previously reported that Congress might have the opportunity to disapprove the CFPB’s disparate impact theory of assignee liability for so-called auto dealer “markup” disparities because the CFPB Bulletin describing its theory was determined by the General Accountability Office (GAO) to be a “rule” subject to override under the Congressional Review Act (CRA).  Our hope became a reality late this afternoon when the House of Representatives passed, by a bipartisan vote of 234 to 175, a joint resolution stating that Congress:

“[D]isapproves the rule submitted by the Bureau of Consumer Financial Protection relating to ‘Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act’ (CFPB Bulletin 2013-02 (March 21, 2013), and printed in the Congressional Record on December 6, 2017, . . . along with a letter of opinion from the [GAO] dated December 5, 2017, that the Bulletin is a rule under the Congressional Review Act), and such rule shall have no force or effect.”

The Senate previously passed this joint resolution on April 18, 2018 by a vote of 51 to 47.  It has been reported that President Trump will sign the joint resolution into law when it is presented to him for executive action.  Like every other legislative measure that is passed by Congress and signed by the President of the United States, the joint resolution of disapproval will be assigned a Public Law number and published in Statutes at Large.  See, e.g., Pub. L. No. 115-74, 131 Stat. 1243 (joint resolution disapproving of CFPB rule relating to arbitration agreements).

The Bulletin

The Bulletin is an official guidance document – a species of what one scholar has characterized as “regulatory dark matter” – that previewed the Bureau’s subsequent ECOA enforcement actions against assignees of automobile retail installment sale contracts (“RISCs”).  It set forth the CFPB’s views concerning what it characterized as a significant ECOA compliance risk associated with an asserted assignee “policy” of “allowing” dealerships to negotiate the retail annual percentage rate (APR) under their RISCs by “marking up” the wholesale buy rate established by a prospective assignee.  The Bulletin’s intent to establish and prioritize a supervisory and enforcement initiative with respect to the asserted practice was unmistakably clear not only from its text, but also from the tag line in the accompanying press release – “Consumer Financial Protection Bureau to Hold Auto Lenders Accountable for Illegal Discriminatory Markup.”  Indeed, the blog post that we published on the day the Bulletin was issued was titled “The CFPB previews its coming auto finance fair lending enforcement actions” and the associated webinar that we then hosted was titled, appropriately, “Auto Finance Industry in the CFPB’s Crosshairs.”

The CFPB initiative regarding so-called dealer “mark up” was premised upon what we believe may fairly be characterized, in the parlance of Inclusive Communities, as a disparate impact claim that is “abusive” of banks and sales finance companies that acquire RISCs from independent, unaffiliated dealerships, because it is based on a factual and legal theory that is highly suspect, and in particular seeks to establish causation through the use of statistics alone, which Inclusive Communities holds is improper.  The initiative proved to be highly controversial and became a lightning rod for media, industry, and Congressional criticism of the Bureau.  The industry criticism is probably best reflected and documented in the AFSA study titled “Fair Lending: Implications for the Indirect Auto Finance Market”, an Executive Summary of which is available here.  The congressional criticism included a trilogy of investigative reports prepared by the House Financial Services Committee Majority Staff titled  “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending,Unsafe at Any Bureaucracy, Part II: How the Bureau of Consumer Financial Protection Removed Anti-Fraud Safeguards to Achieve Political Goals and “Unsafe at Any Bureaucracy, Part III: The CFPB’s Vitiated Legal Case Against Auto Lenders.”

We also have written previously about some of the many legal and factual flaws inherent in the approach taken by the Bureau and reflected in the now congressionally-disapproved Bulletin.  See, e.g., “The CFPB Stretches ECOA Past the Breaking Point,” CFPB Monitor (Feb. 21, 2013); Auto Finance and Disparate Impact: Substantive Lessons Learned from Class Certification Decisions,” Consumer Fin. Servs. L. Rep., Vol. 18, Issue 21 (May 1, 2015).   Indeed, in our blog post dated February 21, 2013 – one month before the issuance of the Bulletin – we noted that “there are several things about potential enforcement actions in this area that make them profoundly unfair, and which should cause the CFPB to refrain from pursuing enforcement based on this flawed theory.”  Accordingly, it should surprise no one that the Bulletin has become the first guidance document to be disapproved by Congress pursuant to the CRA.

Application of the CRA to the Bulletin

Some have, and others undoubtedly will, criticize this use of the CRA and seek to downplay the significance of the adoption of a Public Law disapproving the Bulletin.  We take issue with these critiques, and have engaged in some spirited “back and forth” with Professor Adam Levitin at Georgetown Law Center regarding this subject.  We previously replied to a message that Prof. Levitin sent to one of us on Twitter after the GAO issued its determination that the Bulletin is a “rule” subject to congressional review.  More recently, Prof. Levitin posted a Credit Slips Blog post titled “Congressional Review Act Confusion:  Indirect Auto Lending Guidance Edition (a/k/a The Fast & the Pointless)” in which he made various assertions regarding the CRA’s applicability to the Bulletin, and the consequences of its disapproval by Congress (in his opinion, basically none).  Since the impact of CRA disapproval of this CFPB Bulletin appears to be the subject of some debate, we wanted to take this opportunity to explain our view about why Congress’ action is so significant.

CRA Definition of a “Rule”

In his blog post, Prof. Levitin asserts that the Bulletin in not a “rule” subject to congressional review for various reasons.  These reasons include suggestions that the CRA only applies to rules that have “effective dates” because the CRA states that a rule may not “take effect” until the rule and its proposed effective date have been reported to each House of Congress and the Comptroller General pursuant to the CRA.  According to Prof. Levitin, this “suggests that the term ‘rule’ in the CRA means what we normally think of as a ‘rule,’ and not some technical definition.”  This argument strikes us as grasping at straws.

While the Bulletin will become the first guidance document to be disapproved pursuant to the CRA, the notion that a guidance document can be a “rule” subject to congressional review is not novel.  The GAO previously determined that other guidance documents can be “rules” subject to congressional review.  For example, as we reported previously, the GAO determined that the Interagency Leverage Lending Guidance issued jointly by the federal bank regulatory agencies on March 22, 2013 “is a general statement of policy and is a rule under the CRA.”  In concluding that the Interagency Leveraged Lending Guidance was a rule subject to the CRA, the GAO relied upon prior GAO opinions (including one issued in 2001) holding that general statements of policy are “rules,” decisional law under the Administrative Procedure Act and floor statements made by the principal sponsor during final congressional consideration of the bill that became the CRA as well as analyses of legal commentators.  Among other things, the principal sponsor had stated that the types of documents covered by the CRA include “statements of general policy, interpretations of general applicability, and administrative staff manuals and instructions to staff that affect a member of the public.”  Agencies thus were on notice that the CRA definition of a “rule” can encompass guidance documents and that this was by design.

With respect to the allusion to a “technical definition” of a “rule,” it is the prerogative of Congress to define statutory terms in a manner that is consistent with the achievement of its legislative objectives.  The legislative intent was to ensure that elected representatives of the People be afforded an opportunity to disapprove “rules” issued by administrative agencies, including certain guidance documents such as the Bulletin that are an example of administrative overreach. In making its determination, the GAO applied the statutory definition in a straightforward, well-reasoned manner.  As for the statutory requirement to include the proposed effective date when reporting a rule to Congress, absent some statutory or regulatory limitation, a guidance document that does not provide for a deferred effective date presumably is effectively immediately.  If such a guidance document is a “rule” (other than a “major rule”) subject to the CRA, “immediately” presumably should mean the date on which it is reported to each House of Congress and the Comptroller General in compliance with the CRA.

Prof. Levitin further suggests that the Bulletin is not a “rule” because it was not “designed” by the Bureau to “interpret law” or “prescribe . . . policy” and it does not have “future effect” because it is non-binding guidance that has no effect.  More specifically, Prof. Levitin asserts that the Bulletin has no future effect because, inter alia, it does not affirmatively state that the Bureau will bring enforcement actions in these circumstances, and it does not specifically and affirmatively state a position of the Bureau.  According to Prof. Levin, while “[p]erhaps there’s an implicit enforcement threat, “it’s pretty oblique” and, in his view, the guidance is merely “a sort of ‘head’s up, there might be compliance issues here that you guys aren’t aware of, so here’s what you should be thinking.”  We respectfully submit, however, that it cannot seriously be contended that the Bulletin was not designed by the Bureau to interpret law or prescribe policy and to have future effect.  To the contrary, the Bulletin was labeled in the CFPB’s own press release as indicating an intent “to Hold Auto Lenders Accountable for Illegal Discriminatory Markup.”  That does not seem oblique to us; it is an explicit statement of future enforcement actions which, in fact, the Bureau was pursuing at the time the Bulletin was released and which became public later in 2013.

Administrative agencies periodically issue official guidance documents to communicate their position with respect to regulatory compliance issues.  While such documents may be literally non-binding, regulatory agencies do not issue official guidance documents in the hope that they will be disregarded by regulated entities.  The regulatory expectation is that entities subject to the regulatory, supervisory and enforcement authorities of the agency will take to heart the views reflected therein.  As regulated entities are well aware, the failure to take official guidance documents seriously can have significant adverse regulatory consequences.  This is true generally and it was certainly true with respect to the Bulletin.

We fail to understand how the Bulletin could fairly be read as anything other than a statement of policy.  As noted previously, the associated CFPB press release included a statement that the Bureau was going “to Hold Auto Lenders Accountable for Illegal Discriminatory Markup.”  Additionally, the concluding sentence in the Bulletin warned industry participants that “[t]he CFPB will continue to closely review the operations of. . . indirect auto lenders, utilizing all appropriate regulatory tools to assess whether supervisory, enforcement, or other actions may be necessary to ensure that the market for auto lending [sic] provides fair, equitable, and nondiscriminatory access to credit for consumers.”  (emphasis added).

This enforcement threat was, in fact, explicit and there was nothing oblique about it.  This threat publicly came to fruition nine months later with what the Bureau press release characterized as “the largest-ever settlement in an auto loan discrimination case” that was “the result of a CFPB examination that began in September 2012.”  The CFPB press release stated that the associated Consent Order “demonstrates the type of fair lending risk identified in” the Bulletin “explaining that [the Bureau] would hold indirect auto lenders accountable for unlawful discriminatory pricing.”  (emphasis added).  Notwithstanding the suggestion to the contrary by Prof. Levitin, we believe that the irrefutable evidence of the prescriptive nature and future effect of the Bulletin may be found in the Bulletin itself, the associated CFPB press release, various internal CFPB documents posted on the website of the House Financial Services Committee, four public Consent Orders, and in CFPB publications such as Supervisory Highlights and Fair Lending Reports of the Bureau.  From a big picture perspective, it is abundantly clear that the Bulletin was part of an orchestrated CFPB initiative to effectuate a sea change with respect to the discretionary pricing of retail automotive credit by either eliminating dealer discretion or requiring RISC assignees to impose more restrictive “mark up” limits, perform portfolio-level analyses for “mark up” disparities and promptly remunerate alleged affected consumers if disparities were identified at the portfolio level.  The Bulletin says as much when it discusses the approaches RISC assignees should take to manage the asserted ECOA compliance risk.

Implications of Congressional Disapproval

Much undoubtedly will be written about the implications of Congressional disapproval of the Bulletin, and some will suggest, as Prof. Levitin has in the title of his blog post, that it is a “pointless” exercise.  We respectfully disagree with this point of view, and believe a federal court would disagree as well if the issue were ever to be litigated.

In our “back and forth” with Prof. Levitin, he suggested that a Congressional override of the Bulletin would represent merely a disapproval of the Bureau’s statement of its position.  We responded that, in our view, it would also represent a disapproval of the position reflected in the Bulletin pursuant to a Public Law adopted by the elected representatives of the People stating that “such rule shall have no force and effect.”  It seems to us self-evident that the import of a Public Law disapproving the Bulletin would be a disapproval of the position reflected therein because the “position” is embodied in the “statement” of the position and cannot be disassociated with it.  They are, simply stated, indivisible.

So, what exactly is the substantive centerpiece of the Bulletin that Congress today disapproved?  It is the notion that a RISC assignee has a “policy” of “allowing” dealerships to negotiate the APRs under their RISCs by “marking up” the wholesale buy rate established by a prospective assignee and that disparate impact liability may be predicated upon this “policy” if there are “mark-up” disparities in the portfolio of RISCs acquired by the assignee. One cannot get past the “Background” section of the Bulletin without encountering a reference to supervisory experience of the Bureau confirming that such policies exist and the statement that such discretionary pricing “policies” create a significant risk that they will result in unlawful pricing disparities on a prohibited basis.  The Bulletin proceeds to state that an “indirect auto lender that permits dealer markup and compensates dealers on that basis may be liable for these policies and practices if they result in disparities on a prohibit basis.”  This rule of liability – based on the factual and legal theory set forth in the Bulletin – is the “rule” that Congress has just disapproved.

Viewed from this perspective, if a court is called upon to discern the import of the joint resolution of disapproval in the context of a litigation premised upon this type of disparate impact claim, we are confident that the court will conclude that it represents a repudiation, by Congress, of the substantive centerpiece of the Bulletin.

We hope, however, that no industry participant ever itself in a situation in which it becomes necessary to assert this argument in the context of a CFPB enforcement action.  As we suggested previously, if the Bulletin is invalid, and the CFPB cannot reissue a disapproved rule in “substantially the same form” or issue “a new rule that is substantially the same,” turning around and applying the substantive centerpiece of the disapproved rule in supervision and enforcement would disregard the clear import of an act of Congress.  And it would lead to the most absurd of results – that the CFPB would be forbidden from adopting the “rule” set forth in the Bulletin, but would be free to enforce that “rule” in enforcement actions against industry participants.  We think any federal court would find it impossible to swallow this contradiction.  But, as noted above, our hope is that an administrative agency that respects its role in a representative democracy should not behave in a manner that reflects a desire to nullify the clear import of a Congressional resolution disapproving the disparate impact centerpiece of the Bulletin.

Finally, in his Credit Slips Blog post, Prof. Levitin asserted that our reference to “grandiose and vague ‘will of the People’ language . . . is a glaring sign that there’s not a good substantive argument” and that we were “falling back” on a legislative intent argument.  In this regard, he asserts that we incorrectly assume that a CRA resolution is an affirmative statement of policy and seeks to draw a distinction between an affirmative law requiring 60 votes in the Senate and negative law adopted pursuant to the CRA.

Simply stated, we think it illogical to suggest that a statement of policy can be disapproved without thereby disapproving the substance of the policy that is the subject of the statement.  The purported distinction, based upon Senate filibuster rules, between an affirmative law and a negative law strikes us as curious indeed.  At the end of the day, a Public Law is, in fact, a law and the only relevant question is, “what is its import?”  In written testimony submitted to the House Financial Services Committee on July 12, 2015, Prof. Levitin himself observed that a trio of provisions of a proposed Financial CHOICE Act, including one that “would nullify the CFPB’s indirect auto lending guidance and impose an onerous process for any future guidance,” would “shield discriminatory lenders from legal repercussions.”

Additionally, our perspective strikes us entirely consistent with the policy underlying the CRA, which was to give Congress a veto power over administrative rulemaking that can be, and often is, substantive in nature.  It seems to us that the perspective articulated by Prof. Levtin leads to a result that leaves an administrative agency whose rule has been disapproved to continue to cling to (and apply) the substance of its disapproved rule in supervision and enforcement.  We respectfully submit that the view articulated by Prof. Levitin would have the effect of defeating the central purpose of the CRA.

In sum, although we have enjoyed the engaging “back and forth” with our friend Adam Levitin, it appears that we will have to agree to respectfully disagree.  What remains to be seen is whether the academic discussion in which we have been partaking ever becomes something with more practical impact.  That will, of course, depend on the CFPB’s future action.

On March 28, the Department of Justice (DOJ) brought another lawsuit against an auto finance company alleging the company violated the Servicemembers Civil Relief Act (SCRA) by repossessing vehicles owned by servicemembers without obtaining necessary court orders.

The case, brought against California Auto Finance, was preceded by an investigation that DOJ launched after receiving a single complaint from a servicemember. According to DOJ, the servicemember whose car was repossessed complained that the company had no process to determine customers’ military status.

Notably, the lawsuit filed in federal court does not allege other specific instances of improper repossession beyond the one alleged by the individual servicemember who complained. Rather, DOJ argues that because the company “had, and still has, no policies or practices in place to verify the military status of borrowers before repossessing their vehicles,” the company “may have repossessed motor vehicles, without court orders, from other servicemembers who had made a deposit or installment payment to [California Auto Finance] prior to entering military service and were in military service at the time of the repossession.” Per the complaint, this amounts to “a pattern or practice of violating Section3952(a)(1) of the SCRA, 50 U.S.C. § 3952(a)(1).”

Allegations that a defendant failed to perform an SCRA scrub have become a recurring feature of DOJ complaints in this area, although it’s worth noting that the statute itself does not require checking the Department of Defense’s Defense Manpower Data Center database to verify military status, as opposed to using other methods to determine whether a borrower might be a servicemember. Rather, this apparent requirement has evolved over the course of various consent orders.

DOJ is seeking monetary damages, civil monetary penalties, and injunctive relief to “prevent future repossession that violate the SCRA.”

This suit follows several others filed by DOJ in the past year claiming SCRA violations related to vehicle repossession and disposition. In February, for example, DOJ settled with the City and County of Honolulu, Hawaii and its general contractor for towing services after alleging  these entities violated the SCRA by auctioning or otherwise disposing of motor vehicles owned by servicemembers that were deemed abandoned without first obtaining court orders. Likewise, in October of last year, DOJ entered into a settlement with Westlake Services LLC over allegations that the company and a subsidiary had repossessed vehicles owned by SCRA-protected servicemembers without obtaining the required court orders. So, while military finance in general continues to be an active area of federal enforcement, repossession and disposition is emerging as a sphere of heightened regulatory risk. Here, DOJ bringing suit in response to a single servicemember complaint and a single alleged instance of wrongful repossession speaks for itself.

 

We previously reported that several trade groups had sent letters petitioning the Department of Defense (DoD) to rescind or withdraw Question and Answer #2 (Q&A 2) from its 2016 interpretative rule for the Military Lending Act (MLA) final rule and its December 2017 amendments. Q&A 2 generated much uncertainty regarding application of the MLA’s exemption for purchase money transactions that also finance the purchase of GAP insurance.

In addition to the letters mentioned in our earlier post, the American Bankers Association (ABA) submitted a similar petition to DOD, and the National Automotive Dealers Association (NADA) and the American Financial Services Association (AFSA) likewise sent a joint letter to DoD requesting withdrawal of Q&A 2.

Both letters highlight a key concern that has arisen in light of  Q&A 2: that MLAcovered borrowers and their families are likely to have diminished access to GAP insurance as a result of Dodd’s guidance. The NADA/AFSA petition describes Q&A 2 as “drying up the availability of these products to covered members (and in some cases all consumers) overnight,” with association members “seeking to structure their transactions so as not to trigger application of the statute in the first instance by staying within DOD’s newly constricted motor vehicle financing exclusion.” The ABA letter also states that, “the new interpretation in the amendments has created uncertainty and confusion in the market and potential substantial liability for automobile dealers and lenders who in good faith relied on the plain language of the statute and regulation,” noting that because the December 2017 amendments appear to be retroactive, “vehicle financing loans made after the MLA Regulation effective date of October 3, 2016 may be void and subject to significant penalties and attorneys’ fees.”

It seems these petitions may be achieving their desired effect. We are hearing murmurings that DoD intends to rescind its prior guidance. At least one other blog has made a similar observation,  and our understanding is that the interpretation could be withdrawn as soon as May of this year. If these predictions prove true, it would be a welcome development.

 

Politico has reported that Republican Senator Jerry Moran has introduced a resolution under the Congressional Review Act (CRA) to overturn the CFPB’s 2013 auto finance guidance.

The guidance is set forth in CFPB Bulletin 2013-02, titled “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” (Bulletin).  In December 2017, in response to a request from Senator Pat Toomey, the GAO issued a decision concluding that the Bulletin is a “rule” subject to the CRA.

According to Politico, the resolution introduced by Senator Moran has 15 co-sponsors, including Senator Toomey.  The CRA is the vehicle used by Congress to overturn the CFPB’s arbitration rule in a party-line vote.  CRA resolutions to overturn the CFPB’s final payday/auto title/high-rate installment loan rule have been introduced in the House and Senate.

 

The New York City Department of Consumer Affairs (DCA) has proposed new rules for used car dealers that would require dealers to provide the following disclosures to buyers:

  • A financing disclosure that includes the “sale terms,” “financing terms,” and pricing information for add-on products and services.  The financing terms include three APRs: “the Annual Percentage Rate (APR)” (presumably, the contract APR),  the “lowest APR offered to buyer by any finance company for loan with same term and down payment,” and the “APR offered to buyer by selected finance company”
  • A disclosure of the buyer’s right to cancel

The proposal would also require dealers to conspicuously post a “Used Car Consumer Bill of Rights” in any office or area of the dealer’s location where consumers negotiate and execute sales contracts and maintain an “automobile contract cancellation option report” that must be made available to the DCA upon request.

The American Financial Services Association sent a letter to the DCA commenting on the proposal in which AFSA stated that it believes the proposed disclosures “would confuse consumers and provide little additional consumer benefit.”  AFSA specifically took aim at the proposal’s requirement for three APRs to be disclosed.  AFSA observed that “in many cases, these rates will be different, forcing a consumer to interpret and understand as many as three different rates for the same transaction and may leave a consumer with the impression that the contract APR is lower than it actually is.”

 

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 (seeAuto 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.

Congress may have now have the opportunity to disapprove by a simple majority vote the CFPB’s disparate impact theory of assignee liability for so-called dealer “markup” disparities as a result of a determination by the General Accountability Office (GAO) that the CFPB’s Bulletin describing its legal theory is a “rule” subject to override under the Congressional Review Act (CRA).

We previously blogged about press reports that the GAO had accepted a request from Senator Patrick Toomey to determine whether CFPB Bulletin 2013-02, titled “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” (the “Bulletin”), is a “rule” within the scope of the CRA.  (“Indirect auto lenders” is the term used by the Bureau to refer to persons, such as banks and sales finance companies, that are engaged in the business of accepting assignments of automobile retail installment sale contracts from dealerships.)  We subsequently suggested that a recent GAO determination that the interagency leveraged lending guidance is a “rule” subject to the CRA foreshadowed a similar determination for the CFPB indirect auto finance guidance reflected in the Bulletin.

As it turns out, we were right.  The GAO issued its decision on December 5, 2017, concluding that the Bulletin is a “rule” subject to the CRA because “it is a general statement of policy designed to assist indirect auto lenders to ensure they are operating in compliance with [the] ECOA and Regulation B, as applied to dealer markup and compensation policies.”

The Bulletin is an official guidance document issued by the Bureau on March 21, 2013.  It effectively previewed the Bureau’s subsequent ECOA enforcement actions against assignees of automobile retail installment sale contracts (RISCs), setting forth the views of the CFPB concerning what it characterized as a significant ECOA compliance risk associated with an asserted assignee “policy” of “allowing” dealerships to negotiate the annual percentage rate under a retail installment sale contract by “marking up” the wholesale buy rate established by a prospective assignee.  The Bulletin’s intent to establish its enforcement and supervisory approach with respect to the subject practice was unmistakably clear not only from its text but also from the tag line in the accompanying press release – “Consumer Financial Protection Bureau to Hold Auto Lenders Accountable for Illegal Discriminatory Markup.”

Before responding to Senator’s Toomey’s request, in accordance with its standard procedure for responding to requests of this nature, the GAO solicited and obtained the CFPB’s views.  The Bureau responded to the GAO by letter dated July 7, 2017.

The legal analysis reflected in the GAO opinion is straightforward.  Subject to exceptions not relevant, the CRA adopts the Administrative Procedure Act definition of a “rule,” which states, in relevant part, that a rule is “”the whole or a part of an agency statement of general . . . applicability and future effect designed to implement, interpret, or prescribe law or policy . . ..”  The GAO framed the question presented as “whether a nonbinding general statement of policy, which provides guidance on how [the] CFPB will exercise its discretionary enforcement powers, is a rule under [the] CRA.”  It agreed with the CFPB’s assertion that the Bulletin “is a non-binding guidance document” that “identifies potential risk areas and provides general suggestions for compliance” with the ECOA.

The GAO rejected, however, the CFPB’s argument that the CRA does not apply to the Bulletin because the Bulletin has no legal effect on regulated entities.  Specifically, the Bureau had argued “taken as a whole the CRA can logically apply only to agency documents that have [binding] legal effect.”  The GAO concluded that “CRA requirements apply to general statements of policy, which, by definition, are not legally binding.”

The GAO letter explains that, “to strengthen congressional oversight of agency rulemaking,” the CRA 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.” (emphasis added)  The CFPB acknowledged that it had not complied with this formal reporting requirement because it did not believe the Bulletin was a “rule” subject to the CRA reporting requirement.  In response to the GAO decision, Senator Toomey issued a press release stating that “I intend to do everything in my power to repeal this ill-conceived rule using the Congressional Review Act.”

As explained in prior blog posts, the CRA establishes a streamlined procedure pursuant to which Congress may enact, by simple majority vote, a joint resolution disapproving a “rule.”  A joint resolution of disapproval passed by Congress is presented to the President for executive action.  If approved by the President, the joint resolution is enacted into law and assigned a Public Law number.  If a joint resolution of disapproval is enacted into law, the disapproved rule “may not be reissued in substantially the same form, and a new rule that is substantially the same as such a rule may not be issued, unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.”  Thus, the enactment of a joint resolution of disapproval has a preclusive effect on future regulatory action.

According to a Congressional Research Service report, in prior instances where the GAO determined that the agency action satisfied the CRA definition of a “rule” and joint resolutions of disapproval were subsequently introduced, “the Senate has considered the publication in the Congressional Record of the official GAO opinions . . . as the trigger date for the initiation period to submit a disapproval resolution and for the action period during which such a resolution qualifies for expedited consideration in the Senate.”  If a joint resolution of disapproval is introduced, it therefore would appear that the CRA clock may start to run for expedited consideration by the Senate once the GAO opinion is published in the Congressional Record.

So, what does all of this mean for the automobile sales finance industry?  We think there are several important implications.  First, the GAO’s decision strengthens the argument that the CFPB’s effort to regulate dealer pricing of RISCs should have been pursued through a rulemaking proceeding, rather than through “guidance” and enforcement actions.

Second, the GAO determination means that Congress could override the Bulletin by means of a joint resolution of disapproval, with a majority vote that could not be avoided by a Senate filibuster.  Given the Republican opposition to the CFPB’s pursuit of this issue, and the Democratic support for auto dealers as well (expressed in letters from members of Congress to the CFPB), there seems to be a fair chance of a CRA disapproval resolution passing.  Indeed, as Senator Toomey noted in his press release, the House of Representatives passed the Reforming CFPB Indirect Auto Financing Guidance Act in November 2015 by a bipartisan vote of 332-96.

What would the enactment of a joint resolution of disapproval mean?  Obviously, it would mean the Bulletin would be null and void.  But since the Bulletin was non-binding anyway and the CFPB did not comply with the CRA reporting requirement, what difference would it make?

Opponents of the CFPB’s disparate impact theory of liability would argue that the override of the guidance is, by definition, a Congressional repudiation of its content – the legal and factual theories of liability contained in the Bulletin. The corollary of this compelling argument is that the override would preclude not only another similar “rule,” but also that which is inherent in the existence of such a “rule” – its application to regulated entities in supervisory activities or enforcement actions. This repudiation would be permanent (unless altered by a subsequent Congressional enactment), and might therefore offer a lasting end to the CFPB’s efforts to regulate dealer pricing through banks and sales finance companies, rather than the potentially temporary hiatus that could be brought about by new leadership at the CFPB.

We hope that Congress will override the Bulletin under the CRA, and possibly put a final end to this highly questionable legal and factual ECOA theory.

A new CFPB report, “Growth in Longer-Term Auto Loans”, discusses a CFPB finding that there has been a significant increase in the use of longer-term “auto loans” since 2009.  The report could presage greater CFPB scrutiny of longer-term auto loans in supervisory examinations of banks and auto finance companies.  This greater scrutiny might include an attempt by the CFPB to use its UDAAP authority to restrict the availability of longer-term auto loans, such as by imposing an “ability to repay” standard with respect to such loans.

In December 2016, the CFPB unveiled Consumer Credit Trends, which it described as “a web-based tool to help the public monitor developments in consumer lending and forecast potential future risks.”  The tool uses de-identified credit information taken from a nationally-representative sample of credit records maintained by one of the nationwide consumer reporting agencies and tracks originations for mortgages, credit cards, auto loans, and student loans by borrower credit score, income level, and age.

When the tool was unveiled, the CFPB indicated that it planned to “offer analyses on notable findings as warranted.”  In the new report, which the CFPB describes as “the first Quarterly Consumer Credit Trends report” and an “update to the CFPB’s Consumer Credit Trends dashboard,” the CFPB “explore[s] what the data reveals about the increased use of these longer-term loans.”  For purposes of the report, “longer-term loans” are defined as loans with terms of six years or more.  In the accompanying press release, the CFPB stated that “the average length of ownership of a vehicle is approximately 6.5 years” and asserted that “[t]his means that many consumers might still owe on loans after they are no longer driving the vehicle.”

The report says that it uses the same definition of “auto loans” as is used in the Consumer Credit Trends dashboard. The dashboard defines the term to mean “closed-end loans used by consumers to finance the purchase of a new or used auto, where the auto is used as collateral for the loan.”  Although the dashboard uses the term “loan,” we assume that the data analyzed also includes the predominant form of purchase money auto finance transactions – retail installment sale transactions with automobile dealerships.

In purporting to paraphrase the dashboard definition of “auto loans,” the report also refers to leases used to finance automobile purchases.  We assume that this reference to leases was included unintentionally because the dashboard definition of “auto loans” does not refer to leases, and consumer lease transactions are not purchase money consumer credit transactions.

The CFPB report includes the following findings based upon its review of the sample “auto loan” dataset:

  • The share of longer-term loans increased from 26 percent of auto loans originated in 2009 to 42 percent of 2017 auto loan originations (with six-year term loans being the most common “longer-term loan”).
  • The credit scores of borrowers who obtain longer-term loans are lower than the scores of borrowers who obtain five-year loans. (The average credit score of borrowers taking out longer-term loans is 39 points below the average score of borrowers obtaining five-year loans, although the report notes that the lowest average credit scores are for borrowers who obtain loans with terms of less than three years.)
  • Longer-term loans tend to be used to finance larger amounts.
  • Default rates associated with longer-term loans are higher than those for shorter-term loans.

The CFPB makes the following observations based on its findings:

  • Consumers may be increasingly using longer-term loans because they are buying more expensive cars, making smaller down payments, or otherwise financing larger amounts.
  • While longer-term loans may make monthly payments more affordable, financing costs are higher over the life of the loan.  As a result, it is not clear consumers are better off obtaining longer-term loans or are likely to be more successful in repaying those loans.
  • Riskier borrowers are more likely to opt-for a longer-term loan to ease their monthly debt burden.
  • The movement toward longer-term loans may increase the likelihood of borrower default (although the CFPB notes that default rates for both five- and six-year loans have been increasing).

The first three observations appear to be statements of the obvious and/or inferences that are speculative in nature.  The last observation is based upon data comparing cumulative default rates by origination-year cohort for five- and six-year loans, with “default” being defined as 90 or more days past due or having a major derogatory event such as a repossession.  Notably, the report states that “[t]he higher default rates observed for six-year loans should not be interpreted as a causal relationship” since “riskier borrowers” may prefer longer-term loans.  Nevertheless, the report concludes that the absence of a decline in the default rates for six-year loans as they have become more widely used “suggests that the movement toward these longer-term loans may increase the likelihood of borrower default, potentially posing greater risks to both borrowers and lenders.”

This concluding observation of the CFPB regarding default rates, and its findings regarding credit scores and loan amounts, may foreshadow supervisory scrutiny with respect to the underwriting of “auto loans” with terms of six years or more.  The end result of such scrutiny may be to restrict the availability of longer-term loans to the ultimate detriment of consumers.