Indirect Auto Lending: GAO Opinion Provides Clarity, But Will It Be Enforced?

A recent finding by the U.S. Government Accountability Office (GAO) could have a significant impact on the indirect auto lending industry. In December, the GAO issued an opinion declaring that a Consumer Financial Protection Bureau bulletin issued on March 21, 2013, titled “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act was a “rule” for the purposes of the Congressional Review Act (CRA).

However, a subsequent decision by CFPB leadership may trigger a passive approach to enforcing that rule.

The 2013 bulletin from the CFPB provided guidance to indirect auto lenders concerning compliance with fair lending and the Equal Credit Opportunity Act. In particular, the bulletin addressed the significance of marked up interest rates charged by dealers which were above interest rates charged by indirect auto lenders stating that there was the potential risk for pricing disparities to prohibited bases such as race or national origin. The bulletin further declared that indirect auto lenders could be subject to liability under fair lending laws for being associated with dealers which implement markups that create pricing disparities to protected classes.

The GAO opinion was triggered by a request from Senator Patrick Toomey to determine whether the bulletin was subject to the CRA. The CFPB contended that the bulletin did not qualify as a “rule” under the CRA since it only provided non-binding guidance which “identified potential risk areas and provides general suggestions for compliance” with ECOA and Regulation B. The GAO disagreed and noted in its findings that the CFPB is a “rule” for the purposes of the CRA because “it is a general statement of policy designed to assist indirect auto lenders to ensure that they are operating in compliance with [the] ECOA and Regulation B, as applied to dealer markup and compensation policies.” Senator Toomey added that the “GAO’s decision makes clear that the CFPB’s back-door effort to regulate auto loans, which was based on a dubious legal justification, did not comply with the Congressional Review Act.”

The GAO’s decision that the bulletin is subject to the CRA is significant from a procedural standpoint. The CRA requires all federal agencies, including regulatory ones like the CFPB, to submit copies of proposed rules to Congress before it can take effect. The CFPB did not do this at the time the bulletin was issued. The GAO’s decision that the bulletin is a rule now subjects it to Congressional review and Congress may vote to disapprove the bulletin by issuing a joint resolution through a majority vote.

Enforcement of the bulletin is another issue. Last month, CFPB Acting Director Mick Mulvaney elected to strip the CFPB’s Office of Fair Lending and Equal Opportunity of enforcement powers. The office will be moved under Mulvaney’s direct supervision where it will focus on “advocacy, coordination, and education.”

The bulletin will remain a rule. However, the current state of Republican leadership may turn a blind eye on enforcing that rule. The stripping of enforcement authority correlates with recent decisions made by Mulvaney in other regulatory areas, including payday lending. Therefore, while the GAO opinion may have provided some clarity regarding an issue that has been pending for five years, the recent decision by the CFPB is likely to have a significant effect on whether that rule is enforced in the future.

Alex Koskey is a member of Baker Donelson’s financial services practice in Atlanta. He can be reached at akoskey@bakerdonelson.com.

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