Americans are set for relief from an Obama-era financial rule

Americans will soon get relief from a rule that at its founding used controversial methods to determine if customers were discriminated against, as the Senate voted this week to overturn the rule.

Last month, Sen. Jerry Moran (R-Kan.), with the support of Sen. Pat Toomey (R-Pa.), introduced legislation to overturn the Consumer Financial Protection Bureau’s 2013 “Indirection Auto Lending and Compliance with the Equal Credit Opportunity Act” Bulletin. This comes in response to Toomey’s request last year which asked the Government Accountability Office to examine whether the bulletin qualifies as “guidance” or a “rule” with enforcement actions.

{mosads}Under Obama-era director Richard Cordray, the bureau’s 2013 rule set out to address a common lending arrangement between auto dealerships, customers and third-party lenders. If an indirect or third-party lender wishes to finance the loan, the lender provides a loan interest rate (buy-rate) to the customer and commonly allows the dealer to mark up the interest rate for themselves on top of the buy-rate. The buy-rate and dealer interest rate remain competitively priced as there typically are multiple lenders competing for the loan and the customer searching for the best priced interest rate. The CFPB has expressed concern that the dealers will manipulate the pricing in a way that unfairly discriminates minority borrowers with higher interest rate, thus violating the Equal Credit Opportunity Act.

Under Dodd-Frank, the CFPB is prohibited from regulating automotive financing under the guise of discrimination. To get around this, the bureau operates under the presumption that indirect auto lenders are acting as “creditors” which make them liable under the Equal Credit Opportunity Act for discriminating against customers based on race, ethnicity and gender. However, federal law prohibits auto lenders from collecting this information when financing auto loans. 

Without a box to check on an application form for identifying a customer’s race or gender, it is extremely important to ask how the CFPB was able to collect this information and enact their “guidance.” The bureau examined costumer’s names and zip codes to determine who they believed were discriminated against in auto financing. That’s right, the CFPB guessed who was discriminated based on people’s names, where they lived and the rate they paid for financing. 

Even more shocking is internal documents show that CFPB employees knew their guestimation methods were questionable and may “overestimate racial disparities by attributing exclusively to race differences that are driven in part by factors associated with geography” as detailed in 2015 by House Financial Services majority staff’s report. It should be surprising to no one that under Cordray’s leadership the bureau used their independence from congressional oversight to skirt Dodd-Frank’s legal limitations in order to pursue politically motivated settlements with companies. If it sounds like a shake down, it is, as noted by Committee Chairman Jeb Hensarling.

In May of last year, Toomey asked the Government Accountability Office to review if the “guidance” issued is a “rule” with enforcement capability under the ECOA. In December, the GAO determined the “guidance” was in fact a rule and is subject to the Congressional Review Act. As such, Congresses has 60 legislative days to use the CRA and issue a resolution that disapproves and overturns a federal agency’s rules and prevents the agency from issuing a substantially similar rule in the future. With GOA’s findings, the rule was considered published in the Congressional Record, starting the 60-day clock. 

This week, Senate Banking Committee Chairman Sen. Mike Crapo (R-Idaho) took to the floor of the Senate to introduce the Moran-Toomey legislation which was voted on the following day in  favor of overturning the rule in a 51-47 vote. Representative Lee Zeldin (R-N.Y.) has the companion legislation in the House and the House should move quickly to overturn this politically motivated rule that used questionable methods to target auto-finance lenders.

James Setterlund is a federal affairs manager at Americans for Tax Reform, a nonprofit group dedicated to lower taxes and limited government.