The House voted Tuesday to undo an Obama-era crackdown on discriminatory auto lending, setting a new precedent for cutting regulations established by the Democratic administration.
Yet the maneuver the GOP used to strike down the auto lending policy is so untested that the vote’s ultimate impact on the $1.2 trillion auto lending market is uncertain and part of a brewing legal debate.
The lower chamber voted 234 to 175 to disapprove of 2013 guidance from the Consumer Financial Protection Bureau that exposed banks and financial firms to an anti-discrimination law if they arrange financing for auto sales through car dealers. Eleven Democrats joined with Republicans in favor.
The vote was the latest example of the GOP-led Congress using the Congressional Review Act, previously a little-used tool, to strike down regulations imposed under former President Barack Obama. The resolution is now headed to President Trump’s desk, as the Senate previously approved it in April.
Republicans had used the Congressional Review Act 15 times to cancel Obama-era rules.
Tuesday’s resolution, however, was unprecedented in that it did not technically apply to a rule — that is, an official rule enacted by an agency and put through the regular process of seeking comment from the public.
Instead, the “rule” is a 2013 bulletin that the CFPB sent out to lenders notifying them that laws preventing discriminatory lending apply to them when they work with dealers to arrange financing for auto sales.
Accordingly, the resolution passed Tuesday raises a tricky legal question regarding what it means for Congress to disapprove of informal guidance that an agency sends to businesses. When Congress disapproves of a rule enforced by an agency, the meaning is clear: The agency is not allowed to enforce the rule any more. But when it disapproves of guidance relating to an underlying law, the intent is murkier.
“It’s very unclear what the impact will be,” said Amit Narang, a regulatory policy advocate for Public Citizen, a consumer advocacy organization.
As Congress neared a vote, industry lawyers and consumer advocates engaged in a debate over whether the rule would prevent the CFPB from holding lenders to the anti-discrimination law in the future.
Auto dealers and finance companies argue that congressional disapproval means that the CFPB would have to leave them alone in the future.
The 2013 bulletin notified auto finance companies that the CFPB would come after them for discriminatory loans they financed that were arranged by auto dealers. Lenders could be sued for discriminatory lending on the theory of disparate impact if minorities were overcharged or cut off from lending.
At the time, the memo was controversial. Congressional Republicans accused the CFPB of trying to indirectly regulate auto dealers through third-party finance companies. Auto dealers had specifically been given a carveout from regulation in the 2010 Dodd-Frank law that created the CFPB. But the bureau judged that the step was justified to crack down on discriminatory lending.
Worse, from the perspective of the GOP and the industry, was the method that the CFPB would use to gauge whether auto finance companies fell afoul of the law. Since lenders are not allowed to ask the race of borrowers, the CFPB would regulate on the basis of whether a borrower was likely to be a minority on the basis of his name and location.
The CFPB’s goal, National Automobile Dealers Association executive vice president of legislative affairs David Regan told reporters last week, was to prevent auto dealers from offering some consumers discounted loans altogether. Now, that possibility would be foreclosed.
“The disapproval of this guidance absolutely has a consumer benefit,” Regan said.
Last year, Sen. Pat Toomey, R-Pa., requested, and received, a determination from the Government Accountability Office that the 2013 guidance counts as a federal rule for the purposes of the Congressional Review Act, allowing for it to be struck down.
Yet the underlying law, the Equal Credit Opportunity Act, remains in place. And some legal experts think that the CFPB would be free in the future to enforce it.
“In the longer term, if the bureau gets leadership that wants to enforce the underlying law, I still doubt that it changes enforcement because the CRA does not say anything about enforcement,” noted Jeff Sovern, a law professor at St. John’s University, “but rather only prohibits disapproved rules from taking effect and bars the agency from issuing rules that are substantially the same.”
Sovern is one of a few academics who have been in a debate over the ramifications of the disapproval with lawyers with Ballard Spahr, a law firm that represents financial institutions.
Christopher Willis, a partner with the firm, argued that congressional disapproval meant that Congress has ruled out the legal theory the CFPB was using — that lenders could be held liable for loans arranged by auto dealers for which minorities were thought to be disproportionately overcharged.
“The point is, Congress has said this rule doesn’t exist — we have invalidated this rule,” Willis said.
“The disapproval has to mean something,” he added.
For now, with Trump appointee Mick Mulvaney heading the CFPB, all sides think the question is an academic one. Mulvaney is not expected to bring enforcement actions against lenders.
But both sides agree that the resolution, depending on how it’s interpreted, could be significant years down the road. Willis noted the issue has come up before. In the late 1990s and early 2000s, consumers won several large class-action lawsuits against auto finance companies for discriminatory lending.
Narang, the consumer advocate, argued one certain outcome would be regulatory uncertainty. Regulatory guidance, he said, is generally issued not to impose rules on industries, but to allow industry participants to understand how existing rules affect them. Often, it is issued at the request of companies that want certainty.
Narang noted that Mulvaney simply could have reversed the guidance, which would be as easily revoked as it was put into place. “This is clearly a dangerous precedent,” he said.
Speaking on the House Floor, Financial Services Committee chairman Jeb Hensarling, R-Tx., used the same framing to make the opposite point.
“Guidance is supposed to tell a market participant, ‘OK, we understand what you’re trying to do, and what you’re trying to do is permissible,'” he said. “But instead, the bureau flipped it on its head and said, ‘No you are not allowed to do x, y, and z’ — which is essentially rulemaking.”
