U.S. House passes bill revoking CFPB auto lending guidance

A bill that would limit the U.S. Consumer Financial Protection Bureau’s 2013 auto lending guidance passed the House of Representatives late Wednesday by a 332-96 vote.

H.R. 1737 -- the Reforming CFPB Indirect Auto Financing Guidance Act -- would revoke 2013 auto lending guidance from the CFPB. The guidance suggests lenders should either impose limits on or eliminate dealerships’ ability to adjust, on a case-by-case basis, the amount of compensation they keep for arranging a consumer auto loan, a discretionary practice that the CFPB says can lead to discriminatory loan pricing. The bureau oversees lenders but not dealers.

Eighty-eight Democrats joined 244 Republicans in voting for the bill. Republicans were unanimous in support of the bill, while Democrats comprised all 96 of the “nay” votes. One Republican and four Democrats did not vote.

Hurdles ahead

The bill still faces several hurdles before it could become law. Industry insiders told Automotive News earlier this year that the bill faces an uphill climb in the U.S. Senate. Even if it does pass, it could face a veto from President Barack Obama, who opposes the bill. In that case, a two-thirds majority in both houses would be required to override the president’s veto.

The Obama administration said Monday it opposes the bill because the CFPB guidance “helps ensure customers are not charged disproportionately higher prices for auto loans because of their race, color, religion or other characteristics that should have no bearing on loan decisions.”

But in an opinion piece published in The Hill this week, NADA President Peter Welch said the CFPB guidance would impede dealers' ability to "cut their own compensation to reduce a customer’s rate to meet or beat a competing offer."

The bill, which was introduced by U.S. Reps. Frank Guinta, R-N.H., and Ed Perlmutter, D-Colo., had 166 co-sponsors -- 101 Republicans and 65 Democrats.

The bill’s proponents, including Guinta and Rep. Jeb Hensarling, R-Texas, argued Wednesday on the House floor that the bill would protect consumers from higher interest rates and would increase transparency at the CFPB.

Opponents, including Reps. Elijah Cummings, D-Md., and Maxine Waters, D-Calif., said the bill would harm consumers, especially minorities, by limiting the CFPB’s ability to curb lending discrimination.

The legislation would require the CFPB to give notice and open a public comment period before issuing guidance and to make public the data, methodologies and other information the bureau leans on, among other measures.

NADA reacts

The National Automobile Dealers Association, which has strongly backed the bill, in a news release today praised the House for passing the bill, which it says will increase transparency and would not impede on the CFPB’s ability to enforce fair credit laws.

“The CFPB is clearly trying to eliminate a consumer’s ability to receive a discount on credit in the showroom,” Welch said in a statement Wednesday. “It is reasonable for Congress to ask for minimal due process to protect consumers.”

The dealer compensation method in question is known as dealer reserve. Dealer reserve is the retail margin that is included in the consumer’s cost, or interest rate, on an auto loan to cover the dealership’s cost in arranging it. Lenders typically cap the reserve at 2 or 3 percentage points and pay it to the dealership in a lump sum.

The CFPB says lenders’ practice of allowing dealerships to vary the amount of reserve they take on loans has resulted in minorities and other legally protected groups paying higher interest rates than other borrowers, even if the lender didn’t intend to discriminate. The CFPB calls that outcome a disparate impact. NADA and other dealer groups call the CFPB’s proxy methodology for determining discrimination flawed.

CFPB probes

The CFPB has started investigating lenders that allow dealer reserve, including Ally Financial, American Honda Finance and Fifth Third, for allegedly unfair lending practices.

Toyota Financial Services is also the subject of a CFPB lending probe.

Ally paid $98 million, including $80 million in consumer restitution funds, to settle CFPB charges of discriminatory lending but did not change its policies on dealer reserve. Honda Finance, on the other hand, agreed in its settlement with the CFPB to change its policy and cap dealer reserve at 1.25 percentage points for loans of 60 months or fewer and at 1 percentage point for loans greater than 60 months. No civil penalties were assessed. Honda Finance said it would establish a $24 million consumer compensation fund.

Fifth Third Bancorp reached an $18 million settlement with the CFPB and the U.S. Department of Justice to resolve charges that it discriminated against African American and Hispanic borrowers, the CFPB said in September. Fifth Third agreed to the same dealer reserve caps as Honda Finance.

Hannah Lutz contributed to this report.