The US Senate on Wednesday voted to scrap Obama-era guidance aimed at preventing auto lenders from charging borrowers higher rates based on factors such as race or national origin.
The Senate voted 51 to 47 to end the guidance, which was issued in 2013 by the Consumer Financial Protection Bureau and regarded by critics as an overstep of the agency’s powers.
“The CFPB wrongly used its over-reaching indirect auto-lending guidance as an enforcement weapon,” Republican Senator Jerry Moran, who sponsored Wednesday’s disapproval resolution, said on the Senate floor.
To become law, Wednesday’s resolution needs to be approved by the House and then signed by President Donald Trump. Its proponents are confident those hurdles will be cleared.
The White House said on Tuesday Trump’s advisors would recommend the president signs it into law.
The guidance was meant to hold lenders that offer auto loans through dealerships responsible for any discriminatory pricing based on factors such as race, religion, sex or national origin.
It targeted dealer mark-ups, or additional interest auto dealers can charge for loans they originate for third-party lenders.
Dealers can receive compensation from the lenders if they manage to charge the borrowers a higher rate, but the CFPB has warned the practice could result in illegal discrimination.
Critics of the guidance have argued that the compliance cost has been a burden for financial institutions, that metrics used by the CFPB to determine discrimination were flawed and that the agency does not have authority to regulate loans issued by dealerships.
In December, the Government Accountability Office determined the guidance document amounted to a formal rule and as such should have been subject to Congressional review - opening the door for Wednesday’s vote.
LONG SHADOW
The CFPB has been a significant force in the US$1.2trn auto loan market and has completed several enforcement actions against auto lenders.
The largest hit Ally Financial, which agreed to pay almost US$100m in 2013 to settle claims made by the CFPB and the Department of Justice that it charged minority borrowers more on their auto loans.
Other lenders reacted by spending significant time and money to beef up their compliance systems and stay out of the CFPB’s crosshairs.
“Auto finance companies that aren’t used to being scrutinized the way banks are scrutinized had a lot of work to do,” said Jean Noonan, a partner at Hudson Cook, a law firm specialized in helping financial companies comply with consumer regulations.
“It’s been a heavy lift for many of them.”
ABS IMPACT
The standoff between the agency and its critics has so far had limited repercussions in the US$203bn market for securitization backed by auto loans, nearly a fifth of which comprises loans to subprime borrowers.
CFPB fines to auto lenders, unlike prior settlements extracted by regulators against residential mortgage lenders, have not been paid out of the trusts from which the asset-backed securities are issued.
More broadly, however, some investors say the CFPB’s actions have helped keep lenders - and some of their most aggressive practices - in check.
“(The CFPB) definitely rooted out some of the questionable lending and collection practices,” said Henry Song, a portfolio manager at Diamond Hill Capital Management, and an investor in subprime auto ABS.
“The lenders are always saying that it has not been a big deal. But it certainly is a big deal to have regulators looking at them based on their investment into compliance.”
Even in the wake of Wednesday’s vote, many think lenders are unlikely to immediately reverse course.
Jennifer Thomas, a mortgage and structured finance analysts at Loomis, Sayles & Company, said spending millions to put compliance systems in place is still often cheaper than paying fines for many lenders.
“They are not going to pull back now and take that away,” she told IFR.
Legal experts also said it is unlikely that the agency will pursue such cases under Trump-appointed Director Mick Mulvaney.
The Dodd-Frank financial reform also gave state attorneys general more power to enforce rules to protect consumers.
“State attorneys general will almost certainly seek to fill any void left by decreased CFPB enforcement, and have a variety of tools at their disposal to enforce state and federal consumer financial laws,” lawyers at Mayer Brown wrote in February.