The Senate is poised to vote this week to rescind a five-year old Obama-era policy warning auto lenders against allowing minority borrowers to be charged more than their white peers.
The legislation, sponsored by Sen. Jerry Moran (R-Kan.), takes aim at one of the Consumer Financial Protection Bureau’s most controversial campaigns and addresses years of complaints by Republicans and the powerful auto industry that the watchdog agency had overstepped its bounds.
It also comes as the Trump-appointed leader of the agency, Mick Mulvaney, works to tame the bureau’s ambitions and pledges that it will no longer push the legal envelope.
The auto lending guidance is the latest example of “runaway regulations,” Senate Majority Leader Mitch McConnell (R-Ky.) said Tuesday morning. Repealing it “will protect consumers from a brazen attempt by the past director of the Consumer Financial Protection Bureau to stretch his authority and interfere in the auto industry.”
Democrats and consumer advocates have said that repealing the CFPB policy would open the door to discriminatory practices. The measure would “allow some auto lenders and dealers to continue charging African Americans and Latinos hundreds — even thousands — more just because of their race,” said Sen. Elizabeth Warren (D-Mass.). “Let’s be clear: Discrimination in auto lending is alive and well.”
The legislation, which has more than a dozen Republican sponsors, needs a simple majority to pass. Senators began debating the bill Tuesday afternoon. It could come up for a vote late Tuesday or Wednesday morning. It also has the support of the White House, but still must pass the House.
The fight centers on guidance issued by CFPB in 2013 that took aim at a common industry practice that allows auto dealers to mark up interest rates offered by finance companies. Finance firms such as Ally, for example, set an interest rate based on objective criteria — including borrowers’ credit history and the size of their down payments. Auto dealers are then free to raise the interest rates within certain limits. The finance companies and the dealers split the extra profits.
The CFPB argued that auto dealers were using that discretionary markup to charge black and Hispanic borrowers more than white ones, even if they had the same credit scores. Over several years, the agency fined several auto lenders millions of dollars for discriminating against minority borrowers.
Ally Financial, one of the nation’s largest automobile lenders, paid $98 million after the CFPB accused it of charging 235,000 minority borrowers higher rates. On average, black, Hispanic and Asian American customers paid from $200 to more than $300 more for auto loans than did whites who were equally creditworthy, federal officials charged. American Honda agreed to pay $24 million to borrowers to settle its case, and Fifth Third Bank paid $18 million. None admitted wrongdoing.
Since then, some lenders eliminated discretionary dealer markups, while Republicans and the auto industry lashed out at the bureau’s guidance. House Republicans launched a multiyear investigation into the matter, arguing that the CFPB used faulty data to support the policy. The guidance, auto dealers said, made it more difficult to offer consumers discounts on their car purchases out of fear they would be accused of discrimination.
The CFPB is barred from regulating auto dealers directly, but it found a backdoor by extracting big fines from the auto lenders with which the dealers work, critics said. The financial overhaul law, known as the Dodd-Frank Act, that created the watchdog bureau “got a lot of things wrong,” McConnell said. “But one thing Dodd-Frank got right was protecting auto dealers from meddling by the CFPB.”
Despite the consumer bureau’s new leadership, the auto industry has remained concerned about how and when the guidance would be enforced, industry officials said. “As long as this guidance is out there, there is the possibility that the CFPB will attempt to eliminate auto loan discounts for consumers,” said Jared Allen, spokesman for the National Automobile Dealers Association.
The GOP legislation relies on the Congressional Review Act, or CRA, to rescind the guidance, a tool Republicans have used to block more than a dozen Obama administration rules. But Democrats and consumer advocates have objected, noting that the law has traditionally been used to rescind rules or regulations, which undergo months of public scrutiny but not agency guidance, which is more informal.
“They have used the Congressional Review Act more than any other Congress in history to give handouts to big corporations at the expense of ordinary Americans,” said Sen. Sherrod Brown (D-Ohio), ranking member of the Senate Banking Committee.
Republicans argue that in this case, the CFPB’s guidance is, in fact, a rule subject to a CRA vote. “This ill-advised Obama-era auto-lending rule issued by the CFPB missed the mark on both process and substance,” said Moran, who introduced the legislation.