The Senate on Wednesday voted to kill a five-year-old Obama administration policy warning auto lenders not to discriminate against minority borrowers.
The legislation, which passed 51 to 47 largely along party lines, is the latest Republican rebuke of the Consumer Financial Protection Bureau’s history of aggressive tactics. Sen. Joe Manchin III (W.Va.) was the only Democrat to vote in favor of the measure.
The auto industry complained for years about the CFPB guidance, which they said was unfair.
“The CFPB wrongly used its overreaching, indirect auto-lending guidance as an enforcement weapon, proceeding down the path of an aggressive enforcement action in search of ‘market-tipping settlements,’ ” said Sen. Jerry Moran (R-Kan.), who sponsored the legislation.
Democrats and consumer advocates cautioned that rescinding the CFPB guidance would encourage bad behavior in the more than $1 trillion auto finance market. “Many auto dealers are actively discriminating against people of color. This behavior is pervasive, and the CFPB’s guidance would help to end it,” said Karl Frisch, executive director of the consumer watchdog organization Allied Progress. “They may try to dress it up with political spin, but today the Senate endorsed discrimination.”
The fight centers on guidance issued by the 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 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, and some lenders stopped allowing discretionary markups, cutting into auto dealer profits.
The guidance quickly became one of the CFPB’s most controversial campaigns. 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 Senate 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-era rules. It is expected to quickly gain approval in the House, which has passed similar measures. The CFPB overstepped its legal authority by trying to regulate auto dealers, said Rep. Jeb Hensarling (R-Tex.), chairman of the House Financial Services Committee. “Studies showed that the rule could lead to many credit-worthy borrowers paying more for their auto loans,” he said in a statement.