The action has become a symbol for everything that is wrong with modern administrative agencies. Back in 2013, the Bureau used a guidance document to effectively rewrite the Equal Credit Opportunity Act (ECOA), extending liability over auto finance companies for practices that had never before been considered liable under ECOA. The Bureau then accused four major auto lending firms of racial discrimination, leading to $200 million in out of court settlements.
The case is particularly egregious for a number of reasons. To start with, the CFPB is statutorily exempt from regulating auto dealers under the 2010 Dodd-Frank Act. But by targeting the auto finance companies that deal with auto dealers, the Bureau could regulate the activities of auto dealers through the back door.
Second, instead of going through the notice-and-comment process of a rulemaking, the Bureau used a guidance document to rewrite existing law so it could regulate the industry. The Government Accountability Office earlier this year determined that the guidance document issued by the Bureau is effectively a rule, making it possible to be overturned by a Congressional Review Act resolution of disapproval.
Third, the claims of racial discrimination put forward by the CFPB do not hold up to scrutiny. The Bureau alleged that auto dealers’ practices of marking up interest rates on certain loans were ripe for discrimination. But the CFPB had no data on race or national origin to validate its discrimination allegations, specifically because ECOA prevents dealers from collecting it. The Bureau therefore had to rely on a proxy methodology instead. This methodology proved to be highly erroneous, described at length by a House Financial Services Committee report, as it largely overestimated the number of individuals allegedly discriminated against.
Further, the Bureau’s findings omitted numerous factors, such as an individual’s credit score, that can explain the perceived disparate impact on protected classes. When these factors were taken into account, as they were by many industry studies criticizing the CFPB’s findings, the racial disparity all but disappeared.
Finally, the CFPB’s action appear to have been motivated not by legitimate concerns of violating discrimination laws, but on rooting out a dealer compensation practice that the Bureau believed to make auto loans more expensive. Consumer groups, such as the Center for Responsible Lending, have lobbied against this practice for years. The CFPB relied on analysis by these consumer groups, not consumer complaints or internal research, to justify its enforcement action.
Eliminating the compensation practice amongst the four firms, however, has actually raised the cost of an auto loan. For example, American Honda Finance Corporation, one of four major auto lenders that entered into a consent order with the Bureau, lowered one portion of its markup as a result of the CFPB’s action. But it also raised the price of other aspects of its rates to make up for it, thereby increasing the overall cost of the loan to the consumer by 1.1 percent, or nearly $600 in extra interest payments over the life of a typical loan.
The indirect auto lending fiasco is a prime example of what happens when you create a powerful, unaccountable bureaucracy. So stunning is the debacle that it has become an area of broad bipartisan agreement. In 2015, 88 House Democrats—77 of whom are still members—joined all of their Republican colleagues to pass a bill rescinding the rule. That bill, however, never moved in the Senate.
This week, the House can pass a CRA resolution already approved by the Senate with only a simple majority. A successful resolution would not only overturn the rule, but it would prevent the CFPB from issuing a similar one in the future. Congress has all too little oversight over the Bureau, but it can reclaim some of that this week by blocking one of the worst CFPB regulations—the indirect auto lending rule.