Last month, President Trump and Congress took an unprecedented step against bureaucratic overreach. They used the Congressional Review Act to eliminate one of the many thousands of edicts that federal agencies impose on Americans each year without public participation or judicial supervision. The edict in question was a Consumer Financial Protection Bureau “bulletin” that threatened to punish certain financial institutions unless they imposed controls on the interest rates offered by auto dealers.
The CFPB’s rationale was that the interest rates offered by auto dealers were discriminatory. But then, why not directly regulate the auto dealers themselves?
The answer is that Congress explicitly exempted auto dealers from the CFPB’s broad reach, while allowing other agencies to continue regulating them. Under President Barack Obama’s chosen director, Richard Cordray, the CFPB determined not to let the law get in its way. Within a month of taking office, Cordray created a task force to study how to extend his reach to auto dealers, despite the statutory exemption. The task force came up with an ingenious plan: Regulate auto dealers indirectly by going after the financial institutions — known as indirect auto lenders — that purchase the dealers’ auto loans.
In the now-defunct bulletin, the CFPB set forth its plan of evasion. The Bureau could not prove that indirect auto lenders actually discriminate on the basis of race, because by law, indirect auto lenders are prohibited from asking about the race of the borrower. Instead, the CFPB threatened to charge indirect auto lenders with discrimination if their failure to control auto dealers’ lending practices resulted in higher interest rates for racial minorities. In other words, the bureau told lenders to regulate auto dealers on its behalf — or else.
What kind of agency would have the gall to circumvent Congress’s express limitation on its jurisdiction this way? The kind of agency that is not subject to Congress’s power of the purse. Unlike other agencies, the CFPB’s director can simply demand hundreds of millions of dollars from the Federal Reserve every year without congressional approval. And the president cannot fire him, except for cause. This frees the director to disregard elected officials and to pursue his own priorities outside the law.
By exercising its prerogative to kill the CFPB’s auto-lending bulletin under the Congressional Review Act, Congress did not simply enforce the jurisdictional limitation that Cordray had flouted; it also took a stand against racial stereotyping. Under Cordray, the CFPB had built its case against indirect auto lenders using an algorithm based on outdated census data that assigned race and ethnicity probabilities to borrowers based on their zip code and last name, and then used those probabilities to determine whether minorities were paying higher interest rates. Cordray relied on this methodology even though his own staff had warned that it was biased and inaccurate, a warning that was later confirmed by outside statisticians.
Cordray used that methodology to accuse Ally Financial, an indirect auto lender, of racial discrimination. Ally settled and agreed to pay $98 million, but it never admitted any wrongdoing. In fact, the lender only agreed to pay so much for a trumped-up claim because it needed the FDIC’s blessing to avoid a costly divestment in an unrelated matter, and Director Corday was standing in the way. Not coincidentally, that matter was resolved the very same day Ally settled the CFPB’s discrimination claims.
Predictably, many inside-the-beltway groups swiftly condemned Congress’s joint resolution of disapproval. They say it will “chill federal efforts to end widespread unlawful discrimination” in auto lending.
Nonsense. Congress’s joint resolution does not repeal the Equal Credit Opportunity Act, which prohibits discriminatory lending. Nor does it repeal the CFPB regulations that implement that Act. All it does is eliminate an agency guidance document that tried to regulate auto dealers by pulling the auto lenders’ strings. The Bureau can continue to vigorously enforce federal equal-lending laws, including against indirect auto lenders. And the agencies that properly exercise jurisdiction over auto dealers can continue to regulate them.
Congress was right to censure the CFPB’s abuse of power. But in the end, joint resolutions under the Congressional Review Act do not provide the elected branches of government a significant check on the CFPB’s unprecedented power. That is because the CFPB exerts most of its authority through enforcement actions, and the Congressional Review Act applies only to rules, not adjudications.
The Bureau will continue to serve as a launching pad for lawless, idiosyncratic enforcement initiatives unless the constitutional system of congressional and presidential control is restored. That will have to wait until another day.
Adam Gustafson is a partner at Boyden Gray & Associates PLLC. James R. Conde is an associate at Boyden Gray & Associates PLLC. The authors represent State National Bank of Big Spring, Texas, in a pending constitutional challenge to the Consumer Financial Protection Bureau.
