Why CFPB reform bill could face tougher challenge in the Senate
A bill to limit the Consumer Financial Protection Bureau’s 2013 auto lending guidance has had overwhelming support so far, but when it reaches the Senate, the story could change.
Last week the bill easily passed in the House of Representatives with a vote of 332-96, after moving through the House Financial Services Committee in July.
But the bill, called the Reforming CFPB Indirect Auto Financing Guidance Act, still has to go through Senate before it comes close to becoming law. And although it has some bipartisan support, navigating the Senate could present challenges.
The Senate received the bill last week and referred it to the Committee on Banking, Housing, and Urban Affairs, according to the congress.gov website.
If it becomes law, it would revoke 2013 auto lending guidance from the CFPB that suggests lenders should either limit or eliminate dealerships’ ability to adjust their retail margin on a consumer auto loan on a case-by-case basis. The CFPB, which oversees lenders but not dealers, says dealerships’ ability to set loan pricing results in minorities and legally protected groups paying more, even if no discrimination was intended.
Dealerships’ retail margin -- or dealer reserve -- on an auto loan can range up to 2.5 percentage points. The amount of the margin is reflected in the consumer’s interest rate.
The CFPB ideally would like every consumer to pay the same retail margin on a loan. But dealer groups say that being able to reduce their margin on a loan not only enables them to beat a competing offer but also helps make cars more affordable for consumers with thinner wallets.
Regulators argue that this gives dealers too much flexibility in determining who gets the reduced margin, which could lead to discrimination.
On Tuesday, less than a week after the House passed the bill, the chamber’s Financial Services Committee released a 54-page report critical of the CFPB’s methodology and enforcement actions. “The Bureau’s assault on the auto finance market is a textbook example of how regulators that don’t understand business and economics can harm the very consumers they intend to protect,” the report said.
Bill Fox, chairman of the National Automobile Dealers Association, said last month he is confident the bill will pass, based on bipartisan support so far.
But the Senate’s vote may differ from the House’s, especially since Sen. Elizabeth Warren, D-Mass., headed the formation of the CFPB. Gerald Sachs, a former CFPB lawyer, said in August that he doesn’t think the bill will become a law under the current administration. The “CFPB will finish what they’ve started,” he said.
The Obama administration opposes the bill, saying last week that it would revoke “important guidance designed to prevent discriminatory pricing of auto loans.”
The CFPB has been investigating lenders that allow dealer reserve for what it says could be unfair lending practices. Ally Financial, American Honda Finance and Fifth Third Bancorp all reached settlements with the bureau, ranging from $18 million to $98 million. Honda Finance and Fifth Third both capped dealer reserve rates as part of the settlement; Ally did not. None of the lenders admitted wrongdoing.
Though the results on the bill have been favorable for dealers so far, with the President’s opposition and Warren’s influence, a win in the Senate probably won’t be easy.
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