Mick Mulvaney, acting director, Consumer Financial Protection Bureau Photo credit: BLOOMBERG
The U.S. Senate voted to repeal the Consumer Financial Protection Bureau's auto lending guidance last week. Meanwhile, the CFPB's acting director pushed for more oversight for the bureau and explained his views in revising its enforcement strategy.
A resolution that would rescind the bureau's auto lending guidance, which aims to limit dealerships' retail margin on auto loans, passed by a narrow 51-47 vote Wednesday, April 18. Next, it will head to the House for a vote as early as this week.
Senate Joint Resolution 57 would overturn a 2013 CFPB auto lending bulletin. The bulletin suggested indirect auto lenders either limit dealer reserve, which is the retail margin that dealerships earn for arranging a loan, eliminate dealer discretion on the margin altogether or compensate dealers with a flat fee instead.
The CFPB has said that dealerships' discretion to vary that retail margin led to minorities being charged higher interest rates for auto loans than nonminority borrowers with similar credit, even if no discrimination was intended.
The resolution does not change any fair credit law or regulation, such as the Equal Credit Opportunity Act, Peter Welch, president of the National Automobile Dealers Association, said in a statement. In October, the Government Accountability Office said the 2013 CFPB auto lending bulletin should be considered a rule subject to the Congressional Review Act, which means Congress would have the power to revoke it.
"We hope this [Congressional Review Act] resolution sees swift action in the House of Representatives, which has already demonstrated strong bipartisan support for repealing the CFPB's flawed guidance and preserving important auto loan discounts for consumers," Welch said.
NADA and other trade associations have said consumers can get a better deal on their auto loans when dealers can rely on dealer reserve. If dealerships establish a standard dealer reserve rate, as NADA suggests, they can lower, or "discount," that rate for competitive reasons unrelated to the customer's background.
The CFPB guidance "directed fundamental market changes to the industry, which was already regulated by other federal agencies and state laws and regulations," the American Financial Services Association said in a statement. The guidance was issued without public comment or consultation with other federal agencies, the statement said.
"The vehicle finance market in the United States is a highly competitive market which benefits consumers as dealers and lenders discount pricing and loan rates to sell and finance new and used vehicles," Chris Stinebert, president of AFSA, said in the statement. "The vote today is in the best interests of the car-buying public."
If the House passes the resolution and President Donald Trump signs it to become law, the CFPB could not reissue a new guidance in the same form without authorization by Congress, which would halt the push to limit or eliminate dealer reserve, Welch wrote this month in a supporting the resolution.
Limited power
The congressional efforts to limit the CFPB's power are moving in parallel with similar efforts by its leader.
Mick Mulvaney, acting director of the CFPB, pushed for increased oversight for the bureau and announced an end to what is known as "regulation by enforcement" in testimony to House and Senate committees last week.
Regulation by enforcement, a common practice of former Director Richard Cordray, "is where people find out that you accuse them of breaking the law after you file a lawsuit against them. That's what I stopped," Mulvaney said. "I believe you have a right to know what the law is before I sue you for breaking it."
As director, Cordray maintained that regulation by enforcement was the bureau's strongest option in setting auto lending standards.
During his tenure, major auto lenders such as Ally Financial Inc., Toyota Motor Credit Corp., American Honda Finance Corp. and Fifth Third Bancorp settled with the CFPB and the Department of Justice for potentially discriminatory lending practices. Each of those lenders agreed to pay between $18 million and $98 million to resolve the regulators' claims. Some of the lenders also agreed to cap the retail margins dealerships make for arranging auto loans.
Mulvaney insisted that he has not "burned the place down," as some critics expected. In remarks to the House Financial Services Committee and the Senate Banking Committee, Mulvaney voiced support for a five-person bipartisan commission to lead the CFPB instead of its current single-director leadership structure.
"I don't know of any director of any bureaucracy who has ever come to you and said, 'Please take my power away,' but that's what I'm doing," Mulvaney told the Senate committee. "And to the extent you can do that, I think we will all be well-served by it."
Four limits
He also proposed, in the CFPB's semiannual report to Congress, four ways to limit the bureau's powers:
1. Create an independent inspector general for the bureau.
2. Fund the bureau through congressional appropriations rather than the Federal Reserve.
3. Require legislative approval of major bureau rules.
4. Ensure that the CFPB director answers to the president in the exercise of executive authority.
Mulvaney said several times during his testimonies that he doesn't seek to undermine the mission of the bureau, but he stressed that the lack of oversight of his actions — as currently stipulated by the Dodd-Frank Act — means that if he wanted to thwart the CFPB's mission, he could.
"You can make me look bad, and that's about it," he said. "You can't touch me statutorily."
Mulvaney is expected to step down from his role June 22, unless Trump nominates a CFPB director before then. In that case, Mulvaney would continue in his role until the Senate confirms Trump's nominee.
"Don't rely on me, because I'm not always going to be here," Mulvaney said. "Don't rely on the person. Fix the structure so that we avoid the potential abuses that exist today."