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.

 

In May 2017, we blogged about press reports that the Government Accountability Office (GAO) had accepted a request from Senator Patrick Toomey for a determination concerning whether the CFPB Bulletin 2013-02, titled “Indirect Auto Finance and Compliance with the Equal Credit Opportunity Act,” is a “rule” within the scope of the Congressional Review Act (CRA).  Our blog post also noted reports that the GAO had accepted a similar request from Senator Toomey regarding the interagency leveraged lending guidance (Interagency Guidance) issued jointly by the OCC, the Fed, and the FDIC on March 22, 2013.  (While we did not have a copy of Senator Toomey’s request regarding the CFPB Bulletin when we blogged, we have since obtained a copy.  Both of Senator Toomey’s requests to the GAO were dated March 31, 2017.)

Last week, the GAO issued a response to Senator Toomey’s request regarding the Interagency Guidance.  The GAO concluded that the Interagency Guidance “is a general statement of policy and is a rule under the CLA.”  Under the CRA, an agency must submit a final rule to the GAO and Congress “before a rule can take effect.”  Once this notification requirement has been satisfied, there is a limited period of time during which a joint resolution of disapproval can be introduced and acted upon.  If a joint resolution of disapproval is passed by both houses of Congress, it is sent to the President for executive action.  Most significantly, the CRA establishes a fast-track process under which a joint resolution of disapproval cannot be filibustered in the Senate and can be passed by the Senate by a simple majority vote.

In analyzing the Interagency Guidance, the GAO applied the Administrative Procedure Act’s definition of “rule” which the CRA generally adopts.  The CRA provides that a rule is “the whole or a part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency.”  Three types of rules are excluded from the scope of the CRA: (1) rules of particular applicability; (2) rules relating to agency management or personnel; and (3) rules of agency organization, procedure or practice that do not substantially affect the rights or obligations of non-agency parties.

According to the GAO, the gist of the banking agencies’ argument was that their Interagency Guidance was merely a statement of policy rather than a rule subject to the CRA.  The GAO agreed with the agencies’ characterization of their guidance document as a statement of policy that:

[p]rovides information on the manner in which the Agencies will exercise their authority regarding leveraged lending activities, does not establish a ‘binding norm,’ and does not determine the outcome of any Agency examination of a financial institution.  Rather, the Guidance expresses the regulators’ expectations regarding the sound risk management of leveraged lending activities.

The GAO nevertheless framed the issue presented as “whether this general statement of policy is a rule under the CRA.”

In concluding that the Interagency Guidance is a rule subject to the CRA, the GAO relied on its prior decisions finding general statements of policy to be rules subject to congressional review.  In doing so, the GAO pointed to floor statements made by the principal sponsor during final congressional consideration of the bill that became the CRA as well as the 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.”  The GAO specifically rejected the argument that an agency action cannot be a rule under the CRA unless it establishes legally binding standards that are certain and final and it substantially affects the rights or obligations of third parties.

The CFPB Bulletin setting forth its indirect auto finance guidance was issued on March 21, 2013.  Its stated purpose was to “provide[ ] guidance about compliance with the fair lending requirements of the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B, for indirect auto lenders that permit dealers to increase consumer interest rates and that compensate dealers with a share of the increased interest revenues.”  There are very compelling arguments that the CFPB guidance falls squarely within the CRA definition of a “rule” because it is an agency statement of future effect that is designed to implement, interpret or prescribe law or policy, and it is not one of the types of rules that is expressly excluded from the scope of the CRA.  Additionally, the GAO determination regarding the Interagency Guidance suggests that it would similarly reject any CFPB assertion that the indirect auto finance guidance is not a “rule” because it is a non-binding statement of policy that merely provides information on the manner in which the CFPB will exercise its enforcement and supervisory authority with respect to the subject addressed.

A GAO finding that the CFPB guidance is a “rule” under the CRA could have several potential consequences.  Because the CRA requires an agency to submit a final rule to the GAO and Congress “before [it] can take effect,” the guidance arguably would be ineffective because it presumably was not reported to the GAO and Congress in the manner required by the CRA.

Additionally, any member of Congress might respond to a GAO determination that the CFPB guidance is a “rule” by introducing a joint resolution of disapproval.  According to a Congressional Research Service report, in prior instances where the GAO determined that an 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.”

Finally, a GAO determination that the CFPB guidance is a “rule” could open the door to GAO determination requests and CRA challenges to other CFPB guidance documents that might likewise satisfy the CRA definition of a rule.  As our readers are well aware, CFPB compliance bulletins announcing regulatory expectations have been issued on a wide range of regulatory compliance topics including debt collection, credit reporting, and credit card add-on products.

 

The United States Department of Justice announced last week that Westlake Services LLC and its subsidiary, Wilshire Consumer Capital LLC, have agreed to pay $760,788 to resolve allegations the companies violated the Servicemembers Civil Relief Act (“SCRA”) by repossessing 70 vehicles owned by SCRA-protected servicemembers without obtaining the required court orders.

The CFPB referred the matter to the Justice Department’s Civil Rights Division’s Housing and Civil Enforcement Section in 2016, after receiving a complaint that Los Angeles-based Westlake Services and Wilshire Consumer Capital were conducting repossessions in violation of the SCRA.  The Justice Department sued the companies in United States District Court for the Central District of California.

The United States’ complaint alleged that Westlake and Wilshire repossessed vehicles in violation of 50 U.S.C. § 3952(a) and 50 U.S.C. § 3953(c), respectively.  Both provisions require lenders to obtain a court order before repossessing a covered servicemember’s motor vehicle, with the latter provision extending that protection for one year following the termination of military service.  The complaint alleged the companies failed to check the Defense Manpower Data Center (DMDC) database to determine whether customers were SCRA-protected servicemembers before repossessing vehicles without a court order.

The settlement agreement requires that Westlake and Wilshire pay $10,000 per violation to each of the affected servicemembers, plus an amount to compensate them for any lost equity they suffered in the repossessed vehicle, plus interest.  The companies must also repair the credit reporting of all affected servicemembers and pay a $60,788 civil penalty to the United States.  The companies also agreed that they would not repossess an SCRA-protected servicemember’s vehicle without obtaining a court order or valid SCRA waiver in the future and that they would implement enhanced policies and procedures and training to ensure compliance with SCRA requirements.  The Settlement Agreement is available here.

This is not the first time that Westlake and Wilshire have been the target of a federal agency.  In 2015, the companies entered into a Consent Order with the CFPB under which the companies agreed to pay a $4.25 million civil money penalty and $44.1 million in refunds and debt forgiveness to borrowers for alleged unlawful conduct including engaging in debt collection practices in violation of the Fair Debt Collection Practice Act and advertising auto financing in violation of the Truth in Lending Act.  The alleged unlawful debt collection conduct included:  threatening to refer borrowers for criminal prosecution; illegally disclosing information about debts to borrowers’ employers, friends and family; and using a software program, Skip Tracy, which disguised the phone number and caller ID text information of outbound calls so that the calls appeared to originate from other callers, such as pizza delivery services, flower shops or the borrower’s family and friends.  See “Consent Order with the CFPB.”

American Banker has reported that the Government Accountability Office has accepted a request from Senator Pat Toomey on whether the CFPB’s indirect auto finance guidance issued in March 2013 is a “rule” under the Congressional Review Act (CRA).  It reported that the GAO also accepted a similar request from Senator Toomey regarding the leveraged lending guidance issued jointly by the OCC, Fed and FDIC.  While we have been unable to obtain a copy of Senator Toomey’s request regarding the CFPB guidance, we presume his request regarding the leveraged lending guidance, which we did obtain, is substantially similar to his CFPB request.

The CRA created a fast-track legislative process for Congress to nullify a covered federal “rule” by passing a joint resolution of disapproval that would then be presented to the President for approval or veto.  Under the CRA, “before a rule can take effect,” an agency must submit a final rule to the GAO and Congress.  Upon receipt of the rule by Congress, members of Congress have a limited time window during which they can submit and take action on a joint resolution disapproving the rule.  If the resolution is passed by both the House and Senate, it is sent to the President for signature or veto.  Most significantly, the CRA establishes a process under which a joint resolution of disapproval cannot be filibustered in the Senate and can be passed with only a simple majority.

A GAO finding that the CFPB guidance is a “rule” under the CRA could have several potential consequences.  Because the CRA requires an agency to submit a final rule to the GAO and Congress “before [it] can take effect,” the guidance would potentially be ineffective because it was never submitted to the GAO and Congress under the CRA.  As a result, the CFPB would be faced with the choice of challenging the GAO’s finding, withdrawing the guidance, or reissuing it as rule under the Administrative Procedure Act (APA) notice and comment procedures.

Should the CFPB elect to disregard the GAO’s finding, a private plaintiff might file a lawsuit challenging the guidance’s effectiveness based on the CFPB’s failure to comply with the CRA.  The CRA provides that “No determination, finding, action, or omission under [the CRA] shall be subject to judicial review.”  This prohibition would literally appear to preclude such a lawsuit.  However, according to a Congressional Research Service (CRS) report, a joint statement published by the CRA’s principal sponsors in the Congressional Record indicated that the limitation on judicial review was not intended to prohibit a court from determining that a rule has no legal effect due to an agency’s failure to comply with the requirement to submit a final rule to the GAO and Congress.

Finally, in addition to asserting that the guidance is ineffective due to the CFPB’s failure to comply with the CRA, Republican lawmakers might respond to a GAO finding that the guidance is a “rule” by introducing a CRA joint resolution of disapproval.  According to another CRS report issued in November 2016, the GAO has issued 11 opinions at the request of members of Congress as to whether an agency action was a rule under the CRA.  The report indicates that in seven opinions, the GAO determined that the agency action satisfied the CRA definition of a “rule” and that after receiving these opinions, some members submitted CRA resolutions of disapproval for the “rule” that was never submitted to Congress.  The report also indicates that “in these cases, 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.”

The CRA’s definition of a “rule” is generally the same as the definition of a rule for purposes of the APA.  The APA defines a rule as “the whole or part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency and includes the approval or prescription for the future of rates, wages, corporate or financial structures or reorganizations thereof, prices, facilities, appliances, services or allowances therefor or of valuations, costs, or accounting, or practices bearing on any of the foregoing….”

While Senator Toomey’s office confirmed that the GAO had accepted his requests, his staff was unwilling to provide a copy of the two GAO acceptance letters referenced in the American Banker article.  The reasons given by a staff member for not providing the letters was that they contained private contact information and little more than a sentence accepting the requests and indicating that the GAO was working on them.  According to American Banker, the letters gave no timetable for when the GAO would issue its opinions.

A GAO finding that the CFPB’s indirect auto finance guidance is a “rule” under the CRA could open the door to CRA challenges to other guidance issued by the CFPB.  Such guidance has covered a wide range of topics including debt collection, credit reporting, and credit card add-on products.