Auto lending guidance could end, but not scrutiny

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Fagre Arlowe: Plans are formed.

The U.S. House and Senate votes to repeal the Bureau of Consumer Financial Protection’s auto loan guidance are largely seen as a victory for dealers and lenders. But experts say other regulators and state legislatures continue to keep a sharp eye on auto lending, so any celebration should be short-lived.

The House voted 234-175 last week in favor of a measure to overturn the bureau’s 2013 auto lending bulletin, an Obama-era regulation that aimed to limit dealerships’ retail margins on auto loans to prevent potential discrimination in auto lending. Last month, the Senate narrowly voted to rescind the guidance.

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.

Despite the rollback of the guidance, more than a dozen state attorneys general have announced plans to “pick up where they perceive the [bureau] is leaving off,” said Danielle Fagre Arlowe, senior vice president of state government affairs for the American Financial Services Association.

If the bureau stops aggressively pursuing consumer abuse and financial misconduct, state prosecutors would “redouble” their efforts, attorneys general for 16 states plus the District of Columbia, led by New York and California, said in a December letter to Trump.

In July, Pennsylvania Attorney General Josh Shapiro announced that he would create a Consumer Financial Protection Unit and appointed Nicholas Smyth, a former enforcement attorney at the bureau, to lead the initiative. Eight months later, New Jersey Attorney General Gurbir S. Grewal said in a press release that his state would create a state-level Bureau of Consumer Financial Protection, echoing a similar statement by New Jersey Gov. Phil Murphy.

New Jersey, like the bureau, relies on a “disparate impact” analysis when it reviews allegations of discriminatory lending practices, a spokeswoman from the state’s Division of Consumer Affairs said. The disparate impact theory holds that if members of legally protected classes, such as minorities, pay a higher rate than nonmembers of protected classes, that constitutes discrimination, even if it’s unintentional. New Jersey will continue to use the disparate impact theory “to ensure that all consumers, regardless of race or other protected status, are similarly treated when seeking and obtaining auto-related financing,” the spokeswoman said.

In other states, Fagre Arlowe added, the intention to take on more consumer protection cases is more implicit. “In all these states, the attention could come from the attorney general’s office or from the state’s consumer credit regulator,” she said.

The guidance

The bureau has said that dealerships’ discretion to vary the amount of dealer reserve — the retail margin that dealerships earn for arranging a vehicle loan — resulted in minorities being charged higher interest rates for auto loans than nonminority borrowers with similar credit, even if no discrimination was intended.

The bureau’s 2013 auto lending guidance suggested indirect auto lenders limit dealer reserve, eliminate dealer discretion on the margin altogether or compensate dealers with a flat fee instead.

A few lenders switched to flat fees, but more reacted to the bureau’s guidance and consent orders penalizing lenders by lowering the ceiling on permissible dealer reserve.

In Congress, critics accused the bureau under former Director Richard Cordray of pursuing an end-around play through its auto loan guidance. They said the bureau tried to indirectly regulate dealers, even though Congress cut dealers out of the bureau’s jurisdiction when it was formed in 2010, except for buy-here, pay-here dealers.

The bureau’s opponents also objected to the agency issuing guidance instead of following a formal rule-making procedure.

In October 2017, the Government Accountability Office said the auto lending guidance should be considered a rule subject to the Congressional Review Act, which means Congress would have the power to revoke it.

What’s next

Despite the withdrawal of the guidance, the National Automobile Dealers Association said it will continue to recommend that dealers follow NADA’s Fair Credit Compliance Policy & Program.

NADA recommends that dealerships pick a fixed percentage amount for dealer reserve and only deviate from the fixed amount to offer a discount that can be justified and documented based on an acceptable business reason.

Peter Welch, NADA CEO, said in a blog last month, “Fair credit is critical for consumers everywhere.”

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