On March 7, New Jersey Attorney General Gurbir S. Grewal and the Division of Consumer Affairs announced the filing of a lawsuit against two “Buy Here-Pay Here” auto dealerships and their owner for allegedly unconscionable and deceptive lending practices.

The complaint alleges that defendants sold high-mileage, used autos at grossly inflated prices with excessive down payments; financed the sales through in-house loans with high interest rates and “draconian” terms that created a high risk of default; and then repossessed and resold the vehicles over and over again to different consumers in a practice they refer to as “churning.” The defendants also allegedly engaged in deceptive advertising, failed to disclose the damage and/or required substantial repair and bodywork required for used motor vehicles, and failed to provide consumers with complete copies of signed sales documents, including financing agreements. The complaint alleges that these practices violated the New Jersey Consumer Fraud Act, the New Jersey Motor Vehicle Advertising Regulations, the Automotive Sales Regulations, and the state Used Car Lemon law and regulations.

At the crux of this complaint is the State’s belief that defendants expected that their customers would not be able to make their payments – allegedly evidenced by the fact that the dealerships required buyers to sign documents agreeing to not keep any personal possessions in their vehicles and to rekey the vehicles and provide the dealer with a copy of the keys within seven days of purchase. In one of its examples, the State highlights the fact that a used vehicle was sold to “a twenty-two year old consumer making $10 an hour” at an APR of 23.99% with a total payment of $9,848.

In addition to significant civil money penalties, the State is seeking to permanently close the two subject car dealerships and ban the owner from ever operating a car dealership again. We view the case as more evidence that states appear to be stepping up their scrutiny of high-cost financing offered to used car buyers.

Yesterday, the CFPB released the Winter 2019 edition of its Supervisory Highlights.  The report discusses the Bureau’s examination findings in the areas of automobile loan servicing, deposits, mortgage loan servicing, and remittances.  In this blog post, we focus on the Bureau’s findings relating to auto loan servicing.  (We will discuss the Bureau’s other findings in a separate blog post.)

The auto loan servicing findings include a discussion of interest to auto finance companies, based on the now-familiar topic of ancillary products.   Notably, however, the ancillary product issues identified concern refunds on such products when a consumer’s vehicle is repossessed or is declared a total loss.  These observations underline not only the Bureau’s continued interest in ancillary product issues, but also its high degree of attention to repossession- and collection-related issues in auto finance, which have been present in numerous examinations over the past couple of years.  The Bureau’s emphasis on ancillary product cancellation and refund issues also mirrors similar efforts by state regulators that we have observed.

The discussion in Supervisory Highlights mentions two practices that the Bureau found to be unfair or deceptive.  First, the Bureau stated that “one or more servicers” had made errors in requesting refunds on extended service contracts purchased with used cars.  In essence, the servicers allegedly had used the total mileage on the cars in calculating the refund amount, when the correct calculation should have been based on the miles driven by the consumer after purchase.  The Bureau noted that this error reduced the amount of the refunds provided to consumers, which in turn increased their deficiency balances.  According to the Bureau, the attempts made to collect these inflated balances were “unfair” under Dodd-Frank.  The servicer(s) involved remediated the issues (although the type of remediation is unspecified), and began to “verify mileage calculations” on service contract refunds.

Our take on this issue is that it reflects a pattern we continue to see in CFPB examinations – that errors in operations – be they human or system errors – are still a fertile ground for UDAAP findings by the CFPB.  And, as noted below, when those errors affect deficiency balances or collections, they Bureau will likely identify them as UDAAP violations.

The second issue discussed in Supervisory Highlights seems to be potentially more generally applicable.  The Bureau noted that “one or more servicers” failed altogether to request refunds on ancillary products after repossession or total loss events.  According to the CFPB, the servicers then sent deficiency balance notices to consumers, including a line item for “total credits/rebates.”  The Bureau concluded that this deceived consumers, who interpreted the statements as including any available refunds from ancillary products, when in fact no refunds had been requested by the servicer.  The Bureau went on to note that the servicer(s) involved “remediate[d] affected borrowers,” and “changed deficiency notices to clarify the status of eligible ancillary product rebates.”

On the one hand, this seems like a fairly obvious issue – auto finance companies should make an effort to request ancillary product refunds in the event of a total loss or repossession.  But there are two very strange things about the CFPB’s discussion of this issue that will tend to confuse, rather than assist, auto finance companies.  First, the Bureau notes this as purely a disclosure issue, arguing that the wording of the deficiency notices was misleading.  Second, the going-forward solution was for the deficiency balance disclosure to be changed to “clarify the status” of refunds on ancillary products.

That’s easy for auto finance companies to do, but industry players will undoubtedly be asking the question, “what is the extent of my duty to request ancillary product refunds in these situations?”  This is a significant operational question for auto finance companies, especially because many ancillary products are offered by dealers and administered by companies with which the finance company or bank has no relationship.  The CFPB’s discussion of this issue seems to suggest that there is no duty to request a refund, and indeed there is no indication that the entity involved was required to actually request refunds.  But we think that conclusion is probably a risky one to adopt, since we know that the Bureau (on other occasions) and state regulators have insisted that the finance company or bank does have such a duty.   But, since the Bureau’s discussion is confined solely to disclosure issues, we don’t know what the scope of that duty is.

We also note that although the discussion of this issue in Supervisory Highlights concerned repossessions and total loss situations, it can also arise in the context of early payoffs, when a consumer has purchased a GAP waiver product.  In our view, banks and auto finance companies should be equally sensitive to requesting refunds, calculating those refunds properly, and disclosing their status to consumers when an early payoff makes a GAP product no longer necessary for a consumer.


Early last year, several trade groups, including the National Automotive Dealers Association (NADA), 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 has generated much uncertainty regarding application of the MLA’s exemption for purchase money transactions that also finance the purchase of GAP insurance.  Last month, NADA sent a letter to DoD to provide market data demonstrating that servicemembers are suffering quantifiable injury as a result of the impact of Q&A 2 on indirect auto financing provided by dealers.

In amended Q&A 2, the DoD addressed the application of the MLA rule’s exemptions for credit transactions that are intended to finance the purchase of a motor vehicle or personal property when the credit is secured by the purchased motor vehicle or personal property.  The amended question asked whether the exemptions would apply where the creditor simultaneously extends credit in an amount greater than the purchase price of the motor vehicle or personal property.  The DoD’s amended answer stated that the exemptions are available where credit beyond the purchase price of the object is used to finance “any costs expressly related to that object…provided it does not also finance any credit-related product or service.”

In the amended interpretive rule, the DoD used a credit transaction that finances the purchase of a motor vehicle (and is secured by that vehicle) and also finances optional leather seats and an extended vehicle warranty as an example of a credit transaction that would be eligible for the MLA exemption.  In contrast, the DoD used a credit transaction that includes financing for GAP insurance or a credit insurance premium as an example of a credit transaction that would not be exempt from the MLA.

In its letter, NADA references a meeting that the DoD held with NADA and other petitioning trade groups in September 2018 at which the DoD indicated that in deciding whether to withdraw Q&A 2, its primary consideration would be the impact of Q&A 2 on active duty servicemembers.  NADA previously asserted to DoD that Q&A 2 has caused dealers throughout the country to discontinue offering GAP insurance to servicemembers covered by the MLA, thereby exposing servicemembers “to significant and unexpected liability that occurs when their vehicles are declared a total loss.”

NADA’s letter provides data “developed by a finance source that engages in indirect vehicle financing transactions.”  NADA states that the financing source analyzed (1) its retail installment sales contracts (RISCs) with active duty servicemembers whose vehicles were declared a total loss by comparing the period before Q&A 2 was issued (in which it took assignments of RISCs involving GAP insurance) and the period after the issuance of Q&A 2 (when it no longer took such assignments), and (2) the marketwide impact of Q&A 2 “based on its informed understanding and assessment of the marketplace.”  According to NADA, this analysis found that Q&A 2 “has exposed approximately 5,000 [active duty servicemembers] who purchased and financed vehicles in 2018 to approximately $15 million in liability from total loss occurrences.”

New York has enacted legislation that requires creditors to provide new disclosures when using devices to remotely disable vehicles, commonly referred to as “kill switches.”  The new law took effect immediately upon its signing by Governor Cuomo on October 2, 2018.

First, the law amended New York’s Uniform Commercial Code to add a definition for a “payment assurance device.”  The term is defined as “any device installed in a vehicle that can be used to remotely disable the vehicle.”

Second, the law amended the provisions of New York’s General Business Law dealing with debt collection procedures.  The law amends the list of prohibited practices to add that “no principal creditor” or its agent shall remotely disable a vehicle using a “payment assurance device” to repossess a vehicle “without first having given written notice of the possible remote disabling of a vehicle in the method and timetable agreed upon by the consumer and the creditor in the initial contract for services.”  A “principal creditor” is defined as “any person, firm, corporation or organization to whom a consumer claim is owed, due or asserted to be due or owed, or any assignee for value of said person, firm, corporation or organization.”

The written notice required to be sent before using a “payment assurance device” must:

  • Be mailed by registered or certified mail “to the address at which the debtor will be residing on the expected date of the remote disabling of the vehicle”
  • Be postmarked no later than 10 days “prior to the date on which the principal creditor or his agent obtains the right to remotely disable the vehicle”

Violations of the debt collection prohibitions in New York’s General Business Law are deemed a misdemeanor and the NY Attorney General or the district attorney  of  any county can bring an action to enjoin violations.


In August 2018, we reported about significant changes to Connecticut’s licensing laws for consumer financial services providers that were to take effect on October 1, 2018.  In our blog post, we highlighted a new requirement (which appeared to be unprecedented), for sales finance companies to acquire and maintain information about the ethnicity, race, and sex of applicants for motor vehicle retail installment contracts.  A licensee is required to submit the demographic records collected between October 1, 2018 and June 30, 2019 to the Connecticut Banking Department by July 1, 2019.

We observed that the new requirement presented an apparent conflict with the Regulation B proscription against a non-mortgage creditor inquiring about the race, ethnicity or gender of an applicant.  See 12 C.F.R. § 1002.5(b) (“A creditor shall not inquire about the race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction, except as provided in paragraphs (b)(1) [relating to self-testing that complies with Sections 1002.15 of Regulation B] and (b)(2) of this section [authorizing only an optional request to designate a title on an application form such as Ms., Miss, Mr. or Mrs.])

On September 28, the Connecticut Department of Banking issued a memo stating that it has formally asked the CFPB for an official interpretation as to whether the state’s new requirement is consistent with Regulation B.  The Department also indicated that until it receives additional guidance from the CFPB, it “takes a no-action position as the enforcement of the new requirement.”  The Department also stated that it considers the no-action position necessary to provide it with “additional time to undertake a review of the appropriate manner and form for which [the records required to be kept by sales finance companies] shall be acquired, maintained and reported to this Department.”

If you’ve followed the status of the CFPB’s enforcement actions under the Equal Credit Opportunity Act related to auto dealer finance charge participation, you probably would have concluded that those cases are unlikely to resurface.  Not only did Congress override the CFPB’s Bulletin describing the underlying legal theory, but then the Bureau’s new leadership made a statement immediately thereafter describing the cases as an “overreach.”

Traditionally, state agencies have not been very active with regard to fair lending issues, but the New York Department of Financial Services recently made a public announcement in which it stated its intention to pursue what looks like the same disparate impact theory arising out of indirect auto finance transactions.  The announcement is entitled “DFS Takes Action to Protect New Yorkers from Unfair Auto Lending Practices as Federal Government Rolls Back Consumer Protections,” and “reminds lenders of their liability for any discrimination that may result from markup and compensation policies with third parties such as car dealers.”  The press release cites and relies on New York’s state credit discrimination law, NY Executive Law § 296-A, which is part of New York’s Human Rights Law.  (Section 296-A prohibits discrimination “in the granting, withholding, extending or renewing, or in the fixing of the rates, terms or conditions of, any form of credit, on the basis of race, creed, color, national origin, sexual orientation, military status, age, sex, marital status, disability, or familial status.”)

In particular, the DFS press release urges auto finance companies to perform a similar set of steps as those listed in the now-overridden CFPB Bulletin:

  • “Consider reducing dealer discretion by placing limits on dealer markup, or eliminating dealer discretion to markup interest rates by using a different method of dealer compensation, such as a flat fee for each transaction, that does not potentially result in discrimination.”
  • “Monitor both its whole portfolio and specific dealers for compliance with fair lending policies and procedures.”
  • “The lender should take prompt corrective action if it finds any differences in interest rates that are unexplained by objective credit factors, such as restricting or eliminating a dealer’s ability to mark up, terminating the lender’s relationship with a dealer, and providing restitution to affected consumers.”

So, the NYDFS has essentially staked out the position that it will enforce a set of expectations similar to those used by the CFPB over the past several years.   We would assume that non-bank auto finance companies who purchase retail installment contracts in New York would be subject to the DFS requirements, and subject to examinations by DFS regarding this issue.  The same would be true for any banks over which the NYDFS has authority.

But will New York be willing to engage in enforcement with respect to this highly controversial, and potentially fatally flawed, theory of liability against indirect auto finance companies?  Will it adopt an attitude regarding analytical methods and the use of controls that inflates the appearance of disparities, as the CFPB did?  And having won a major victory in securing the Congressional override of the CFPB’s Bulletin, will the auto finance industry be willing to fight one of these cases in court, based on the well-documented legal and factual problems with the “portfolio” theory of assignee liability based on BISG-based statistical analyses?  We’ll all have to stay tuned to find out.  But it appears that the demise of the dealer pricing disparate impact issue arising from the Congressional override earlier this year may not yet be complete.


The CFPB’s newly-released Summer 2018 edition of Supervisory Highlights represents the CFPB’s first Supervisory Highlights report covering supervisory activities conducted under Acting Director Mick Mulvaney’s leadership.  The Bureau’s most recent prior Supervisory Highlights report was its Summer 2017 edition, which was issued in September 2017.

On October 10, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Key Takeaways from the CFPB’s Summer 2018 Supervisory Highlights.”  The webinar registration form is available here.

Noticeably absent from the new report’s introduction and the Bureau’s press release about the report are statements touting the amount of restitution payments that resulted from supervisory resolutions or the amounts of consumer remediation or civil money penalties resulting from public enforcement actions connected to recent supervisory activities.  (The report does, however, include summaries of the terms of two consent orders entered into by the Bureau, including its settlement with Triton Management Group, Inc., a small-dollar lender, regarding the Bureau’s allegations that Triton had violated the Truth in Lending Act and the CFPA’s UDAAP prohibition by underdisclosing the finance charge on auto title pledges entered into with consumers.)

The report confirms that the Bureau’s supervisory activities have continued without significant change under its new leadership.  It includes the following information:

Automobile loan servicing.  The report indicates that in examinations of auto loan servicing activities, Bureau examiners focus primarily on whether servicers have engaged in unfair, deceptive, or abusive acts or practices prohibited by the CFPA.  It discusses instances observed by examiners in which servicers had sent billing statements to consumers who had experienced a total vehicle loss showing that the insurance proceeds had been applied to the loan so that the loan was paid ahead and the next payment was due months or years in the future.  The CFPB found the due dates in these statements to be inconsistent with the terms of the consumers’ notes which required the insurance proceeds to be applied to the loans as a one-time payment and any remaining balance to be collected according to the consumers’ regular payment schedules.  According to the CFPB, sending such statements was a deceptive practice.  The CFPB indicates that in response to the examination findings, servicers are sending billing statements that accurately reflect the account status after applying insurance proceeds.

The Bureau also found instances where servicers, due to incorrect account coding or the failure of their representatives to timely cancel the repossession, had repossessed vehicles after the repossession should have been cancelled because the consumer had entered into an extension agreement or made a payment.  This was found to be an unfair practice.  The CFPB indicates that in response to the examination findings, servicers are stopping the practice, reviewing the accounts of affected consumers, and removing or remediating all repossession-related fees.

Credit cards.  The report indicates that in examinations of the credit card account management operations of supervised entities, Bureau examiners typically assess advertising and marketing, account origination, account servicing, payments and periodic statements, dispute resolution, and the marketing, sale and servicing of add-on products.  The Bureau found instances where entities failed to properly re-evaluate credit card accounts for APR reductions in accordance with Regulation Z requirements where the APRs on the accounts had previously been increased. The report indicates that the issuers have undertaken, or developed plans to undertake, remedial and corrective actions in response to the examination findings.

Debt collection.  In examinations of larger participants, Bureau examiners found instances where debt collectors, before engaging in further collection activities as to consumers from whom they had received written debt validation disputes, had routinely failed to mail debt verifications to such consumers. The Bureau indicates that in response to the examination findings, the collectors are revising their debt validation procedures and practices to ensure that they obtain appropriate verifications when requested and mail them to consumers before engaging in further collection activities.

Mortgage servicing.  The report indicates that in examinations of servicers, Bureau examiners focus on the loss mitigation process and, in particular, on how servicers handle trial modifications where consumers are paying as agreed. In such examinations, the Bureau found unfair acts or practices relating to the conversion of trial modifications to permanent status and the initiation of foreclosures after consumers accepted loss mitigation offers.  In reviewing the practices of servicers with policies providing for permanent modifications of loans if consumers made four timely trial modification payments, the Bureau found that for nearly 300 consumers who successfully completed the trial modification, the servicers delayed processing the permanent modification for more than 30 days.  During these delays, consumers accrued interest and fees that would not have been accrued if the permanent modification had been processed.  The servicers did not remediate all of the affected consumers ,did not have policies or procedures for remediating consumers in such circumstances, and attributed the modification delays to insufficient staffing.  The Bureau indicates that in response to the examination findings, the servicers are fully remediating affected consumers and developing and implementing policies and procedures to timely convert trial modifications to permanent modifications where the consumers have met the trial modification conditions.

The Bureau also identified instances in which servicers, due to errors in their systems, had engaged in unfair acts or practices by charging consumers amounts not authorized by modification agreements or mortgage notes.  The Bureau indicates that in response to the examination findings, the servicers are remediating affected consumers (presumably by refunding or credit the unauthorized amounts) and correcting loan modification terms in their systems.

With regard to foreclosure practices, Bureau examiners found instances where mortgage servicers had approved borrowers for a loss mitigation option on a non-primary residence and, despite representing to borrowers that they would not initiate foreclosure if the borrower accepted loss mitigation offers in writing or by phone by a specified date, initiated foreclosures even if the borrowers had called or written to accept the loss mitigation offers by that date.  The Bureau identified this as a deceptive act or practice. The Bureau also found instances where borrowers who had submitted complete loss mitigation applications less than 37 days from a scheduled foreclosure sale date were sent a notice by their servicer indicating that their application was complete and stating that the servicer would notify the borrowers of their decision on the applications in writing within 30 days.  However, after sending these notices, the servicers conducted the scheduled foreclosure sales without making a decision on the borrowers’ loss mitigation application.  Interestingly, while the Bureau did not find that this conduct amounted to a “legal violation,” it did find that it could pose a risk of a deceptive practice.

Payday/title lending.  Bureau examiners identified instances of payday lenders engaging in deceptive acts or practices by representing in collection letters that “they will, or may have no choice but to, repossess consumers’ vehicles if the consumers fail to make payments or contact the entities.”  The CFPB observed that such representations were made “despite the fact that these entities did not have business relationships with any party to repossess vehicles and, as a general matter, did not repossess vehicles.”  The Bureau indicates that in response to the examination findings, these entities are ensuring that their collection letters do not contain deceptive content.  Bureau examiners also observed instances where lenders had used debit card numbers or Automated Clearing House (ACH) credentials that consumers had not validly authorized them to use to debit funds in connection with a defaulted single-payment or installment loan.  According to the Bureau, when lenders’ attempts to initiate electronic fund transfers (EFTs) using debit card numbers or ACH credentials that a borrower had identified on authorization forms executed in connection with the defaulted loan were unsuccessful, the lenders would then seek to collect the entire loan balance via EFTs using debit card numbers or ACH credentials that the borrower had supplied to the lenders for other purposes, such as when obtaining other loans or making one-time payments on other loans or the loan at issue.  The Bureau found this to be an unfair act or practice.  With regard to loans for which the consumer had entered into preauthorized EFTs to recur at substantially regular intervals, the Bureau found this conduct to also violate the Regulation E requirement that preauthorized EFTs from a consumer’s account be authorized by a writing signed or similarly authenticated by the consumer.  The Bureau indicates that in response to the examination findings, the lenders are ceasing the violations, remediating borrowers impacted by the invalid EFTs, and revising loan agreement templates and ACH authorization forms.

Small business lending. The Bureau states that in 2016 and 2017, it “began conducting supervision work to assess ECOA compliance in institutions’ small business lending product lines, focusing in particular on the risks of an ECOA violation in underwriting, pricing, and redlining.”  It also states that it “anticipates an ongoing dialogue with supervised institutions and other stakeholders as the Bureau moves forward with supervision work in small business lending.”  In the course of conducting ECOA small business lending reviews, Bureau examiners found instances where financial institutions had “effectively managed the risks of an ECOA violation in their small business lending programs,” with the examiners observing that “the board of directors and management maintained active oversight over the institutions’ compliance management system (CMS) framework.  Institutions developed and implemented comprehensive risk-focused policies and procedures for small business lending originations and actively addressed the risks of an ECOA violation by conducting periodic reviews of small business lending policies and procedures and by revising those policies and procedures as necessary.”  The Bureau adds that “[e]xaminations also observed that one or more institutions maintained a record of policy and procedure updates to ensure that they were kept current.”  With regard to self-monitoring, Bureau examiners found that institutions had “implemented small business lending monitoring programs and conducted semi-annual ECOA risk assessments that include assessments of small business lending.  In addition, one or more institutions actively monitored pricing-exception practices and volume through a committee.”  When the examinations included file reviews of manual underwriting overrides at one or more institutions, Bureau examiners “found that credit decisions made by the institutions were consistent with the requirements of ECOA, and thus the examinations did not find any violations of ECOA.”  The only negative findings made by Bureau examiners involved instances where institutions had collected and maintained (in useable form) only limited data on small business lending decisions.  The Bureau states that “[l]imited availability of data could impede an institution’s ability to monitor and test for the risks of ECOA violations through statistical analyses.”

Supervision program developments.  The report discusses the March 2018 mortgage servicing final rule and the May 2018 amendments to the TILA-RESPA integrated disclosure rule.  With regard to fair lending developments, it discusses recent HMDA-related developments and small business lending review procedures.  With regard to small business lending, the Bureau highlights that its reviews include a fair lending assessment of an institution’s compliance management system (CMS) related to small business lending and that CMS reviews include assessments of the institution’s board and management oversight, compliance program (policies and procedures, training, monitoring and/or audit, and complaint response), and service provider oversight.  The CFPB indicates that in some ECOA small business lending reviews, examiners may look at an institution’s fair lending risks and controls related to origination or pricing of small business lending products, including a geographic distribution analysis of small business loan applications, originations, loan officers, or marketing and outreach, in order to assess potential redlining risk.  It further indicates that such reviews may include statistical analysis of lending data in order to identify fair lending risks and appropriate areas of focus during the examination.  The Bureau states that “[n]otably, statistical analysis is only one factor taken into account by examination teams that review small business lending for ECOA compliance. Reviews typically include other methodologies to assess compliance, including policy and procedure reviews, interviews with management and staff, and reviews of individual loan files.”

In the CFPB’s RFI on its supervision program, one of the topics on which the CFPB sought comment is the usefulness of Supervisory Highlights to share findings and promote transparency.  The new report indicates that the Bureau “expects the publication of Supervisory Highlights will continue to aid Bureau-supervised entities in their efforts to comply with Federal consumer financial law.”  Presumably, this means that we will now again be seeing new editions of Supervisory Highlights on a regular basis.


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.