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

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

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

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

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

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

 

 

 

 

 

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

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

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

The Bulletin

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

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

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

Application of the CRA to the Bulletin

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

CRA Definition of a “Rule”

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

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

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

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

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

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

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

Implications of Congressional Disapproval

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

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

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

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

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

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

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

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

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

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.

 

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.