CFPB auto-loan crackdown crumbled long before Senate stepped in

The impending repeal of an Obama-era missive that aimed to crack down on discrimination in auto lending carries large symbolic weight for both sides of the debate over financial regulation.

It will also establish an important precedent for Republicans on Capitol Hill who hope to overturn longstanding regulatory guidance from various federal agencies.

But the congressional rebuke will not have much practical impact on the U.S. auto-lending market — a reality that is at odds with the loud cheers and hearty jeers that came in the wake of the Senate’s recent vote on the matter.

The 2013 auto lending guidance from the Consumer Financial Protection Bureau is frequently portrayed as either an overdue crackdown on lending discrimination or a case study in regulatory overreach.

The truth is that the guidance was part of a wider CFPB effort — aimed at changing how auto loans get priced — that crumbled even before Director Richard Cordray’s departure last November. Banks and other auto lenders generally did not succumb to the agency’s pressure to change the way they priced loans originated at car dealerships.

“By and large, the lenders said, ‘Thanks but no thanks,’ ” said an industry official who asked not to be identified.

The episode is an example of how policy fights in Washington can take on a life of their own, with interest groups seeking to notch a win long after the issue has lost on-the-ground salience.

In the spring of 2013, top officials at the CFPB were strategizing about how to curtail pricing practices that resulted in minorities paying more for car loans than whites.

Auto dealers have long had the discretion to charge a higher interest rate than the lender authorizes. If the dealer can convince the borrower to pay the higher rate, the dealer and the lender split the extra profit.

Last decade, the National Consumer Law Center analyzed lending data from more than 30 states and concluded that African-American and Latino car buyers were paying higher interest rates than equally creditworthy white borrowers.

As an initial step, the CFPB issued regulatory guidance in March 2013 that listed various steps that lenders could take to limit their fair-lending risk. The five-page document sparked an industry backlash — lenders saw it as a precursor to stepped-up enforcement of fair-lending laws — though the agency’s supporters maintain that it was never as consequential as critics argued.

“There was nothing mandatory in the guidance,” noted Stuart Rossman, director of litigation at the National Consumer Law Center.

Internal CFPB documents from 2013 that have subsequently been made public reveal that agency officials did not believe that the guidance alone would be sufficient to bring about the end of discretionary markups.

So the question inside the consumer bureau became what to do next.

The CFPB considered issuing a new regulation, but that entailed a lengthy process that could open the door to a legal challenge. The agency had no direct authority over the nation’s more than 18,000 car dealers, a group that held tremendous clout on Capitol Hill.

Another option was to “attempt to enter into a consent order with several auto lenders, enough to tip the market away from discriminatory practices in particular, or markup more generally,” according to an agency memo from April 2013.

This is the path that the CFPB ultimately took. In December 2013, the bureau entered into a consent order with Ally Financial, which was followed by agreements with Fifth Third Bancorp in Cincinnati and the auto-financing arms of Honda and Toyota.

The Ally consent order required the Detroit company to pay $98 million. And it gave the firm the option of either abandoning dealer markups or implementing a compliance program aimed at eliminating racially disparate outcomes.

Ally chose the latter option, with then-CEO Michael Carpenter declaring, “We are not going to be the Trojan horse for driving industry change.”

The CFPB’s warning shots did seem to get a couple of midsize banks to change their pricing policies, though only temporarily.

In April 2014, BMO Harris Bank, the U.S. unit of Toronto-based BMO Financial, announced that it would start paying auto dealers a flat percentage of the loan amount, prompting Cordray to take the unusual step of issuing a press release in praise of a specific bank. BB&T, of Winston-Salem, N.C., followed suit in 2015.

Flat fees were seen as a way to guard against the possibility that equally creditworthy minorities would pay higher prices, since they did not give any discretion to the auto dealers about how much to charge.

But the CFPB’s efforts were hampered by the fragmented nature of the auto lending market. No one lender had more than 10% market share, and each lender had reason to fear that it would lose a substantial amount of business if it stopped allowing dealers to charge discretionary markups. So the practice continued at almost every lender.

Then in December 2016, in a blog post that drew little media attention, the CFPB signaled that it was no longer going to prioritize fair-lending enforcement in auto lending. The agency argued that it had made progress, and it cited fair-lending risks in student loans, mortgages and small-business loans as bigger priorities.

Since then, both BMO Harris and BB&T have abandoned the pricing models they had adopted a few years earlier.

“While we had some successes with the flat fee program announced in 2015, BB&T also experienced an overall reduced in volume,” bank spokesman Brian Davis said in an email. “We introduced a more traditional auto pricing program in March of this year to provide our dealer clients with more options and better flexibility.”

“BB&T remains firmly committed to the auto finance industry and to the fair and equal treatment of all customers,” he added.

Industry lobbyists, most notably those representing auto dealers, have been pushing Congress to weaken the five-year-old auto-lending guidance since late 2015.

Back when their effort began, the CFPB was still a thorn in the industry’s side. But after President Trump tabbed Republican stalwart Mick Mulvaney as acting director of the CFPB in November, auto lenders breathed a sigh of relief.

“I think it is unlikely that the CFPB is going to pursue fair lending in the same way that it was pursued under the Cordray administration,” said John Redding, a lawyer at Buckley Sandler LLP.

Nonetheless, the lobbying push in Congress continued.

For the National Automobile Dealers Association, the repeal vote offered an opportunity to flex its sizable muscles and secure a bipartisan vote in support of its agenda, even if the victory was mostly symbolic.

On April 18, the Senate voted 51-47 to repeal the 2013 guidance, with Democratic Sen. Joe Manchin crossing the aisle to vote with Republicans. The House of Representatives is also expected to pass the measure, and President Trump is expected to sign it.

“I do think it’s an important development in that it really does put Congress on record,” said Bill Himpler, executive vice president at the American Financial Services Association, which represents various auto lenders.

But other observers argued that the industry’s show of strength on Capitol Hill could backfire in the long run. That is because the nation’s fair-lending laws remain in effect, and after the guidance’s repeal, the CFPB will no longer have the authority to clarify how those laws apply to auto lenders.

“What is lost is the ability of a future CFPB director to issue new guidance explaining how banks can work with auto dealers to originate car loans without violating the fair-lending laws,” Jaret Seiberg, an analyst at Guggenheim Washington Research Group, wrote in a research note.

“There will be a CFPB director in the future who wants to bring lending-bias cases on car loans. That means the compliance risk and burden will be even greater going forward.”