CFPB’s Dealer Markup Guidance Faces Repeal in Congress

  • William Hoffman
  • December 6, 2017
U.S. Congress D.C.

U.S. Congress D.C.Congress’ investigative unit determined a controversial 2013 guideline from the Consumer Financial Protection Bureau — which holds financial institutions responsible for a discriminatory lending practice at dealerships — is subject to Congressional review and could be headed to Capitol Hill for a vote among deregulatory-minded Republicans.   

In March, Senator Pat Toomey (R-Pa.) requested that the U.S. Government Accountability Office (GAO) review the CFPB’s Obama-era regulation to determine whether it is eligible for a repeal, and this week the office ruled that it is subject to the Congressional Review Act.  

The CFPB’s original guidance sought to inform lenders that it would begin enforcing fair lending requirements of the Equal Credit Opportunity Act (ECOA) as it applies to the practice of dealer markup.

ECOA states that a creditor can not discriminate “in any aspect of the credit transaction” on the basis of race, national origin, or other characteristics outlined in the law.

The CFPB was concerned that these protected classes were receiving disproportionately high interest rates because of the incentives of “dealer markup,” which is when a dealer fits the borrower into a higher-interest deal than the lender had originally approved, and then the dealership collects the difference.  

At the time of implementation, the CFPB argued that the rule is not subject to Congressional review because it had no legal effect on regulated entities. The GAO did not disagree with that argument but found that previous decisions imposed Congressional review requirements on “general statements of policy,” of which the CFPB’s dealer markup rule applies.

The auto industry has spent tens of millions of dollars in consent orders to the CFPB over the years for violations of dealer markup including settlements with Ally Financial Inc.,  American Honda Finance Corp., Fifth Third Bank, and more.

The bureau opted to limit dealer markup to a lower cap, rather than force lenders and dealers to eliminate the practice altogether. BB&T Bank and BMO Harris were the only two lenders who opted into a flat-rate system in which the dealer doesn’t have the same flexibility to arrange a deal. Earlier this year, BMO Harris opted to revamp it’s flat-rate system into three tiers, bringing back some of that flexibility to the space.

3 - Readers Like This Post

Leave a Reply

Your email address will not be published. Required fields are marked *