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U.S. House, in victory for dealers, votes to curb CFPB lending quidance

By moconnell on 7/2/2018

By Jackie Charniga Automotive News

The U.S. House, in a victory for dealers, passed a measure that would scrap an Obama-era regulation aimed at limiting dealerships' retail margins on auto loans, which the Consumer Financial Protection Bureau said may have led to minority borrowers being charged more on loans.

The House vote comes after the Senate last month narrowly voted to rescind the CFPB's 2013 bulletin crafted to address lending practices at auto dealerships. The measure now goes to the White House, where President Donald Trump is expected to sign it.

The guidance is one of the most controversial policies implemented by the bureau, created under President Barack Obama in the wake of the 2008-09 financial crisis.

The House vote was 234-175 in favor of repeal. The U.S. Senate vote on April 18 was 51-47 to repeal.

National Automobile Dealers Association CEO Peter Welch said the vote preserves "the ability of local dealerships to offer discounted auto loans to their customers."

NADA and other trade associations have said consumers can get a better deal on their auto loans when dealers can rely on dealer reserve, which is the retail margin that dealerships earn for arranging a loan. If dealerships establish a standard dealer reserve rate, as NADA suggests, they can lower, or "discount," that rate for competitive reasons unrelated to the customer's background.

Welch called the joint resolution is "a measured response to the CFPB’s attempt to avoid congressional scrutiny by issuing 'guidance' that imposed a new policy without necessary procedural safeguards."

Welch said NADA will encourage dealerships to take up the trade group’s voluntary fair credit compliance program, which is based on a U.S. Department of Justice model.

The program, Welch said, helps eliminate fair credit risk in auto lending while ensuring a competitive marketplace.

Cody Lusk, CEO of the American International Automobile Dealers Association, said repeal of the lending guideline will allow dealers to return to offering more competitive financing choices.

"Auto dealerships are primarily small family businesses, and never should have been targeted by the CFPB, which has strayed from its mission of regulating massive Wall Street financial institutions," Lusk said in a statement Tuesday.

The American Financial Services Association, which represents lenders, said the guidance would cause "fundamental market changes" for an industry already heavily regulated on state and federal levels. 

“This vote indicates that American consumers have spoken to their elected representatives to say they want competitive pricing on vehicle loans,” AFSA CEO Chris Stinebert said in a statement.

Power to revoke

In October, the Government Accountability Office said the 2013 CFPB auto lending bulletin should be considered subject to the Congressional Review Act, which means Congress has the power to revoke it.

Though the bureau has no jurisdiction over franchised dealerships, which are regulated at the federal level by the Federal Trade Commission and the Department of Justice, the guidance suggested indirect auto lenders either limit dealer reserve, eliminate dealer discretion on the margin altogether or compensate dealers with a flat fee.

The bureau suggested with the bulletin that variances in dealerships' discretion caused minorities to be charged higher interest rates than their nonminority counterparts with similar credit, even if no discrimination was intended.

That claim was based on flawed methodology, according to Welch, who wrote in an op-ed Monday that by using names and ZIP codes to guess the race and gender of credit customers, the bureau had no method of accurately determining if discrimination occurred.

If Trump signs the resolution into law, the bureau could not reissue a new guidance in the same form without authorization by Congress, which would halt the push to limit or eliminate dealer reserve, Welch wrote in a separate blog post last month.

'Textbook case'

NADA had made repeal of the bureau's guidance one of its top legislative priorities, emailing its members to urge members of Congress to vote for the resolution.

David Regan, NADA executive vice president of legislative affairs, told reporters on a call last week that the bureau must "stay in their swim lane."

He added: "Based on all these facts and circumstances, this is a textbook case of application of the Congressional Review Act for this guidance."

Dealerships spend an "inordinate" amount of money on compliance programs and training materials, Regan said, and don't require the oversight of another federal regulator.

"Compliance is inherent in the culture today in dealerships," Regan said. "It's definitely a cost of doing business, but there is no alternative but to provide a compliant approach in the dealership today, especially in respect to auto financing issues."

*This article first appeared in Automotive News on May 8, 2018.