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.

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.

 

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.

 

 

Republican members of the House Financial Services Committee recently released a report, prepared by the Republican Staff of the Committee, titled “Unsafe at Any Bureaucracy, Part III: The CFPB’s Vitiated Legal Case Against Auto Lenders.”  This is the third Republican Staff report examining the automotive ECOA enforcement actions of the CFPB with respect to what its characterizes as a “dealer markup” of the wholesale buy rate established by the assignee of a retail installment sale contract (“RISC”).  We previously wrote about the first investigative report in this series, which was titled “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending.”  The latest report discusses two subjects.

The “Vitiated Legal Case”

The third report is devoted principally to “demonstrat[ing] that under” the Supreme Court decision in Inclusive Communities, “if the CFPB were to rely upon the legal theory it deployed in previous enforcement actions against auto financiers, its claims would not survive judicial scrutiny.”  As a threshold matter, the report asserts that disparate impact claims are not cognizable under the ECOA because the ECOA does not contain “results-oriented language” like that which the Supreme Court relied upon in holding that disparate impact claims are cognizable under the Fair Housing Act (“FHA”).   The ECOA speaks instead in terms of discriminating against an applicant on a prohibited basis.  The report further asserts that Inclusive Communities interpreted the adoption of the FHA Amendments of 1988, which it said contemplated the existence of disparate impact liability, as Congressional ratification of prior appellate decisions holding that disparate impact claims are cognizable under the FHA.  By way of contrast, however, the report notes that “Congress has made no such amendments to ECOA.”

The staff report also asserts, and contains a robust discussion of, additional reasons why the Bureau could not establish a prima facie case of disparate impact liability against an assignee of RISCs.  Specifically, for reasons discussed therein, the report concludes that: (i) the asserted “discretion” to “mark up” the wholesale buy rate is not a specific “policy” upon which a disparate impact claim may be based; and (ii) the CFPB could not meet the robust causality standard that Inclusive Communities reiterated and expounded upon in its discussion of the safeguards against abusive disparate impact claims.  Finally, the report suggests that, “[b]y asking only whether a minority [buyer] paid more than the non-Hispanic white average, the CFPB does not accurately assess whether he or she was actually harmed by the disparate impact.”

The report’s discussion of the “vitiated legal case” against assignees of RISCs concludes with the observations that “[f]uzzy logic and false comparisons are unfortunately prevalent in the” Bureau’s ECOA auto enforcement actions, as is a “lack of rigor that leads to unsupported and unreliable conclusions.”  We have written previously about some of the issues discussed in the report, including in our articles on the Supreme Court decision in Inclusive Communities, “Auto Finance and Disparate Impact: Substantive Lessons Learned from Class Certification Decisions,” and a February 2006 Business Lawyer article titled “The ECOA Discrimination Proscription and Disparate Impact – Interpreting the Meaning of the Words That Actually Are There.”

The Auto Finance Larger Participant Rule

The press release issued by the Republican members of the Committee highlights the final subject covered by the report.   Titled “CFPB Director Failed to Heed Attorney Advice on Auto Lending Rule, Likely Violated Federal Law,” the press release asserts that the Bureau may have violated the Administrative Procedures Act in adopting the larger participant rule for the automobile financing market (the “LPR”).  Quoting from the Supplementary Information accompanying the proposed LPR, the report states that the definition of a “larger participant” is “based upon ‘quantitative information on the number of market participants and their number and dollar volume of annual originations’ taken from Experian’s AutoCount database.”

According to the report, during the comment period for the proposed LPR, the Bureau received requests for a list of the companies that it believed would qualify as “larger participants” under the proposed rule, and “‘a number of comments pertaining directly or indirectly to the Experian list.’” Believing the Experian AutoCount data, and any information derived from it, to be proprietary information that it was not at liberty to disclose, the Bureau did not respond with the requested information.

The report indicates, however, that after the comment period ended, Experian informed the Bureau that it had no objection to: (i) releasing the list of the names of the entities that the Bureau estimated would be “larger participants” under the proposed volume threshold for larger participant status; and (ii) the relative market share for each listed entity.  Relying upon internal CFPB documents obtained by the Committee, the report asserts that the Bureau did not follow an internal legal recommendation to reopen the comment period, publish this information and request comments with respect to it before proceeding to adopt a final LPR for the automobile financing market.

Republican members of the House Financial Services Committee recently released a report, prepared by the Republican Staff of the Committee, which chronicles in detail the controversial automotive ECOA enforcement initiative of the CFPB with respect to what it characterizes as “dealer markup.”  The highly critical nature of the report is encapsulated by its title, which is “Unsafe at Any Bureaucracy:  CFPB Junk Science and Indirect Auto Lending.”  The report was announced in a press release which is titled “Internal Documents Reveal Weakness of CFPB’s ‘Disparate Impact’ Claims Against Vehicle Finance Business.”

Notwithstanding its scathing title, the report itself is a captivating read with a scholarly tone to it.  Moreover, some of its more newsworthy assertions are substantiated with citations to, and quotations from, internal CFPB documents that are posted on the website of the House Financial Services Committee.  The report, and the supporting documents, provide the reader with an inside glimpse into the formulation and execution of the Bureau’s enforcement strategies with respect to dealer finance income under motor vehicle retail installment sale contracts.  According to the report, some of these internal documents acknowledge areas of potential vulnerability in the event of contested litigation.  The areas of litigation risk to the CFPB include several dispositive legal issues, as well as questions relating to the statistical methodology employed by the Bureau.

The legal issues discussed in the report include: (1) whether disparate impact claims are cognizable under the ECOA; (2) whether the asserted assignee “policy” of “allowing” dealerships the discretion to “mark up” wholesale buy rates when negotiating contract APRs with their customers is a “specific policy or practice” within the meaning of Supreme Court disparate impact jurisprudence; (3) whether a potential assignee is a “creditor” under the ECOA with respect to retail installment sale contracts (“RISCs”) entered into on a “spot delivery” basis before the decision of a prospective assignee has been communicated to the dealership; (4) whether the assignee “portfolio imbalance” theory of liability, and the statistical analytical approach employed by the Bureau, would enable it to state a prima facie disparate impact claim under the “robust causality” requirement recently emphasized by the Supreme Court in Inclusive Communities; and (5) the business justification for the asserted “policy” given that “dealers will not assign RISCs to finance companies that don’t make competitive offers, and finance companies that attempt to impose terms and conditions (including costly, impractical compliance procedures) even slightly more burdensome than its rivals can lose most of their business.”

The “portfolio imbalance” theory of liability refers to the approach of analyzing all of the RISCs acquired by an assignee without differentiating among the assignor dealerships.  The report says that, “[i]n conducting its fair lending analysis, the Bureau examines a[n assignee’s] entire portfolio rather than on a dealer-by-dealer basis.”  As a result, “racial disparities within [an assignee’s] portfolio can be caused by the composition of the portfolio itself.”  This analytical flaw was noted in the AFSA report prepared by Charles River Associates, which concluded that “[a]ggregating contracts originated by individual dealers to the [assignee] portfolio level may create the appearance of differential pricing on a prohibited basis where none exists.”  Even if each dealership prices its RISCs in a manner that is neutral with respect to race and ethnicity, pricing differences among dealerships may create an appearance of disparities at the portfolio level when the RISCs of different dealerships are aggregated to the portfolio of the assignee.

The report is as fascinating a read as its provocative title suggests it will be.  It concludes by saying that “[t]he information and documents accompanying this report should help auto dealers, finance companies, and consumers better understand the Bureau’s flawed approach to indirect auto financing and compliance with [the] ECOA.”  According to the New York Times, “a bureau spokeswoman said the report showed that the agency engaged in careful deliberation.”

Various issues and items addressed in the report have been discussed in prior Ballard legal alerts and CFPB Monitor blog posts, including the following:  “The CFPB Stretches ECOA Past the Breaking Point with Auto Finance”; “Auto finance: can we really call disparate impact ‘discrimination’?”; “CFPB Releases Report on Fair Credit Exams and White Paper on Proxy Methodology”; “Auto Finance Company Agrees to Change Dealer Compensation Policy to Settle CFPB and DOJ Fair Lending Claims”; and “Ballard attorneys author article on auto finance and disparate impact.”  Our article concerning the substantive implications that class certification appellate decisions may have for disparate impact pricing claims alleged against assignees of motor vehicle RISCs is available here.

Yesterday, the following four CFPB-related bills were passed by the House Financial Services Committee:

  • H.R. 3192, the “Homebuyers Assistance Act”: The bill would provide a hold harmless period for the TILA/RESPA Integrated Disclosure (TRID) rule that is scheduled to go into effect on October 3, 2015.  Although the CFPB recently delayed the effective date of the TRID rule until such date, it declined to adopt a formal hold harmless period, despite industry calls for such a period.  H.R. 3192 provides that the TRID rule may not be enforced against any person until February 1, 2016, and that no suit may be filed against a person for a violation of the TRID rule occurring before such date, so long as the person has made a good faith effort to comply with the rule.  Passed by a vote of 45 to 13, the bill’s bi-partisan support in the Committee likely signals passage by the full House. Prospects in the Senate, however, are less clear.  An existing bill, S. 1711 (which is a companion bill to H.R. 2213), would provide for a TRID rule hold harmless period until January 1, 2016.  The bill was introduced on July 7, 2015 and referred to the Committee on Banking, Housing and Urban Affairs, but no further action has been taken.
  • H.R. 1210, the “Portfolio Lending and Mortgage Access Bill”: The bill would modify the TILA ability to repay provisions by creating a safe harbor for depository institutions without regard to their size for loans that the institution retains in portfolio from origination where any prepayment penalties comply with the phase-out requirements for prepayment penalties on qualified mortgages.  The bill would also create a safe harbor from the TILA anti-steering provision (for which the CFPB has not yet proposed implementing regulations) that prohibits a mortgage originator from steering a consumer from a qualified mortgage for which the consumer is qualified to a mortgage that is not a qualified mortgage.  The conditions for the safe harbor are that the creditor on the loan is a depository institution that has informed the mortgage originator that it intends to retain the loan in portfolio for the life of the loan and the originator informs the consumer that the creditor intends to do so.  The bill also had bi-partisan support in the Committee, passing by a vote of 38 to 18.
  • H.R. 1737, the “Reforming CFPB Indirect Auto Financing Guidance Act”: The bill would nullify the CFPB’s indirect auto finance guidance issued in March 2013 and require the CFPB to provide for a notice and comment period before issuing any new guidance onindirect auto finance.  The bill also includes requirements for the CFPB when proposing and issuing such guidance to (1) make publicly available “all studies, data, methodologies, analyses, and other information” it relied on, (2) consult with the Fed, FTC and DOJ, and (3) conduct a study of the guidance’s impact on consumers and “women-owned, minority-owned, and small businesses.”  The bill passed by a vote of  47 to 10.
  • H.R. 1941, the “Financial Institutions Examination Fairness and Reform Act”: The bill would establish deadlines within which the banking regulators and CFPB must hold exit interviews after an examination and issue final examination reports.  The bill would also establish an Office of Independent Examination Review from which financial institutions can seek an independent review of a material supervisory determination contained in a final examination report.  The bill passed by a vote of 45 to 13.

 

 

The CFPB issued a final rule on June 10, 2015 allowing it to supervise nonbank companies that qualify as “larger participants of a market for automobile financing.”  Relatedly, it adopted simultaneously a separate rule defining certain automobile leases as a “financial product or service.”  These rules will be effective 60 days after their publication in the Federal Register.

To enable its examiners to immediately begin to prepare for examinations of qualifying entities, the CFPB concurrently released its auto finance examination procedures.  These procedures will be used by CFPB examiners to examine both bank and nonbanks.

The larger participant rule is based on the CFPB’s authority to supervise nonbank entities considered to be “a larger participant of a market for other consumer financial products or services.”  Nonbank larger participants can include specialty finance companies, manufacturer “captive” finance companies, and “Buy Here Pay Here” (BHPH) finance companies.  Because Dodd-Frank allows the CFPB to supervise all service providers for supervised entities, regardless of size, the rule also allows the CFPB to supervise all service providers to “larger participant” auto finance companies.

The CFPB’s press release states that the CFPB adopted the larger participant rule largely as proposed, with only minor changes.  As proposed, the final rule defines a “larger participant” as a nonbank covered entity engaged in “automobile financing” that has at least 10,000 aggregate annual originations.  For a detailed summary of the final rule, see our legal alert.

On June 18, 2015, from 12 p.m. to 1:30 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Implications for Banks and Nonbanks from the CFPB’s Auto Finance Larger Participant Rule and New Auto Finance Exam Procedures.”  In the webinar, we will discuss the rule in detail and what companies need to do now to prepare for the CFPB’s new scrutiny of their auto finance and leasing activities.  We will also discuss the new exam procedures. The webinar registration form is available here.

Yesterday, the CFPB finalized its larger participant rule for nonbank auto finance companies, making them subject to supervision after the effective date of the rule.  But the Bureau’s press release and newly-released auto finance examination procedures, to me, are even more significant, because they signal areas of future concentration for the Bureau in examinations of both banks and nonbanks in the auto finance space.

Below are a few key areas of focus that I gleaned from reading yesterday’s releases:

  • Ancillary products, like GAP insurance and extended service contracts, are not mentioned in the press release, but receive heavy attention in the exam procedures.  Given the history of regulatory attention to similar products in other market sectors over the past two decades, it’s no surprise that the CFPB is signaling lots of scrutiny of these products in the auto finance market.
  • Leasing is clearly a headline issue, with the CFPB devoting a massive discussion in the Supplementary Information accompanying the final rule to explaining why it believes it has jurisdiction over most consumer vehicle leases under Section 1002(15)(A)(ii) of Dodd-Frank.  Additionally, the CFPB simultaneously adopted a separate rule defining certain automobile leases that are not “the functional equivalent of purchase finance arrangements” as a “financial product or service.”  The examination procedures pay special attention to the advertising and disclosure of lease terms, and the operation of termination-related fees (like excess wear and tear, excess mileage and early termination liability).
  • Advertising of auto finance terms is prominently mentioned in the press release and exam procedures, and the exam procedures specifically discuss whether “affiliates” are advertising credit terms.  To me, this seems like a clear reference to automobile manufacturers’ advertising of subvented financing and leasing promotions that are offered through their captive finance companies.
  • The press release highlights a focus on whether “consumers understand the terms they are getting,” which makes me think about daily simple interest.  Daily simple interest is ubiquitous in the auto finance industry.  Examining the clarity of how daily simple interest is described in the retail installment contract, I believe, will be one of the CFPB’s priorities.
  • Related to that point is payment allocation, which is specifically highlighted in the exam procedures.  How payments are allocated between late fees, finance charge and principal, and how that allocation is disclosed to consumers, will be another likely CFPB focus area.
  • Two areas of third-party monitoring and due diligence that the CFPB mentioned in the exam procedures are especially notable to me: auto dealers and repossession agents.  Both pose significant operational challenges.  Repossession also is mentioned in the press release.
  • GLBA and information-sharing issues are heavily featured in the exam manual.
  • There is an explicit reference in the exam manual to underwriting, default rates, which I believe refers to an ability to repay analysis, and this is likely to be a focus area for subprime auto finance.

I don’t regard many of these issues as a surprise, but they do serve as a valuable roadmap to any bank or nonbank auto finance operation to use in preparing for a future CFPB examination or enforcement investigation.  We will be holding a webinar on June 18 for clients and industry participants to discuss the larger participant rule and the implications of these examination procedures for banks and nonbanks in greater detail.  Hit this link to register.

Just in time for the holiday weekend, the CFPB released its Spring 2015 rulemaking agenda last Friday.  The agenda sets the following timetables:

Prepaid financial products.  In November 2014, the CFPB issued a proposed rule for prepaid financial products, including general-purpose reloadable prepaid cards and certain digital and mobile wallets.  The agenda indicates that the CFPB expects to issue a final rule in January 2016.

Payday and deposit advance loans. In March 2015, the CFPB issued proposals it is considering for payday (and other small-dollar, high-rate) loans in preparation for convening a small business review panel required by the Small Business Regulatory Enforcement Fairness Act (SBREFA) and Dodd-Frank.  The agenda states that the CFPB plans to issue a Notice of Proposed Rulemaking “later in 2015 after additional outreach and analysis.”

Overdrafts.  The CFPB issued a June 2013 white paper and a July 2014 report on checking account overdraft services.  In the agenda, the CFPB states that it “plans to release the results of further studies on overdraft programs and their effects on consumers.  The CFPB is also considering whether rules governing overdraft and related services are warranted, and, if so, what types of rules would be appropriate.”  Although the CFPB’s last agenda set a July 2015 date for further action, the new agenda gives an October 2015 date for further prerule activities.

Larger participants.

  • Auto finance.  In September 2014, the CFPB issued a proposed “larger participant” rule for the auto finance market.  The agenda gives a June 2015 date for issuance of a final rule.
  • Installment and auto title loans.  The agenda confirms that the CFPB is considering one or more new “larger participant” rules for “consumer installment loans and vehicle title loans.”  It sets a January 2016 date for prerule activities.  (The confirmation follows reports at the 2015 PLI Annual Consumer Financial Services Institute held in April 2015 that installment lending was the next non-bank industry that might be subject to a larger participant rule.)

Debt collection.  In November 2013, the CFPB issued an Advance Notice of Proposed Rulemaking concerning debt collection.  The agenda indicates that further prerule activities, which are expected to involve the convening of a SBREFA panel, will occur in December 2015.  The CFPB had indicated in its prior agenda that further prerule activities would occur in April 2015.

Arbitration.  In December 2013, the CFPB issued preliminary results of its study of consumer arbitration as mandated by Section 1028 of the Dodd-Frank Act, and in March 2015, it issued final study results.  The agenda states only that the CFPB “is considering whether rules governing pre-dispute arbitration agreements are warranted, and, if so, what types of rules would be appropriate” and gives a September 2015 for further prerule activities.

Home Mortgage Disclosure Act.  In July 2014, the CFPB issued a proposed rule to implement Dodd-Frank Act amendments to HMDA.  The agenda indicates that the CFPB expects to issue a final rule in August 2015.

Mortgage rules.  In February 2015, the CFPB issued a proposal to modify certain mortgage loan requirements for small creditors, including those that operate predominantly in “rural or underserved” areas.  The agenda sets a September 2015 date for a final rule.

In November 2014, the CFPB issued a proposal to amend various provisions of its mortgage servicing rules.  The agenda has a March 2016 date for issuance of a final rule.

 

 

A study of indirect auto financing commissioned by the American Financial Services Association found that the CFPB’s proxy methodology for measuring disparities in auto dealer reserve is “conceptually flawed in its application and subject to significant bias and estimation error.”  Among the study’s other key findings was that the CFPB’s preferred alternative dealer “compensation” methods, namely the use of a fixed fee, fixed percentage of the amount financed, or hybrid of the two, may increase the cost of credit for consumers.

Conducted by Charles River Associates, the study used an array of industry data and a data base consisting of approximately 8.2 million new and used motor vehicle retail installment contracts originated during 2012 and 2013.  It measured disparities in dealer reserve using the Bayesian Improved Surname Geocoding (BISG) methodology used by the CFPB in supervisory examinations to proxy for race and ethnicity.  (The CFPB explained its use of the BISG proxy method in a white paper that accompanied the release of the CFPB’s proposed larger participant rule for the auto financing market and a special edition of Supervisory Highlights describing the CFPB’s fair credit supervisory activity in “the indirect automobile lending market.”)

The study’s other key findings were the following:

  • When appropriately considering the relevant market complexities and adjusting for proxy bias and error, the observed variations in dealer reserve are largely explained.  The researchers found little evidence that dealers systematically charge different reserves on a prohibited basis and instead found that reserve variations could “largely be explained by objective factors other than race and ethnicity.”
  • The use of biased race and ethnicity proxies creates significant measurement error, which likely results in overstated disparities.  The researchers found that the BISG proxies overestimated minority population counts and that the use of such proxies “can contribute to inflated estimates of alleged consumer harm.”
  • In consent orders involving indirect financing, the Department of Justice has recognized that dealer reserves depend on objective, observable business factors.  The researchers concluded that failure to consider legitimate business factors for observed disparities increases the potential for reaching erroneous conclusions.  The researchers also noted that these factors are generally unknown to the financial institution and regulators.
  • A portfolio-level analysis of retail installment contracts acquired from different dealerships with different operating models, cost structures, pricing policies, competitive landscapes and the like may create the appearance of differential pricing on a prohibited basis when none exists.  The researchers stated that “[g]iven the highly competitive nature of automotive finance, each financial institution observes the pricing of only a subset of a dealer’s contract portfolio, rather than the entire portfolio.”  The researchers also noted that the assignment of contracts is not random and suggested that “conclusions about dealer compensation patterns cannot be ascertained from the analysis of the contracts assigned to a given individual financial institution.”

The study concludes that the “[f]ailure to consider either competition or pricing complexities allows for the application of an overly-simplistic and biased analytical framework, which leads regulators to pursue overly onerous civil-money penalties from financial institutions.”  In this regard, the study notes that “[g]iven the asymmetric nature of information between dealers and financial institutions, financial institutions and their regulators are in a less than ideal position to evaluate the pricing dynamics of transactions at dealers.”  Notwithstanding these limitations, the researchers conclude, based upon their more refined analysis, that “these pricing dynamics are largely explained by several objective factors, rather than by race and ethnicity.”