Senate Votes to Repeal CFPB Auto-Loan Financing Regulatory Guidance

Steven Lofchie Commentary by Steven Lofchie

The U.S. Senate voted to repeal Consumer Financial Protection Bureau ("CFPB") regulatory guidance on auto-loan financing, which purported to regulate discriminatory dealer markups on car loans to consumers.

The CFPB's auto-lending regulatory guidance ("Bulletin"), although not a formal rule, allowed the CFPB to pursue legal claims against car dealerships that allegedly charged minority consumers higher interest rates on their auto loans. By enforcing regulatory guidance rather than developing a rule, the CFPB avoided the Administrative Procedures Act's rulemaking process and related requirements.

In remarks before the Senate, Committee Chair Mike Crapo (R-ID) criticized the regulation, which he stated was implemented as an end run around required rulemaking procedures. Mr. Crapo also questioned the agency's ability to enforce the rule, as Dodd-Frank does not authorize the CFPB to regulate auto-dealers. Citing an internal CFPB memo, Mr. Crapo referenced the CFPB's decision not to develop a rule because it had "no regulatory authority" over auto-dealers. By sidestepping the legal process, Senator Crapo said, the CFPB had denied individuals and businesses the "vital" opportunity to provide feedback on the potential impact of the regulation.

House Financial Services Committee ("FSC") Chair Jeb Hensarling (R-TX) supported the repeal, asserting the financial harm its enforcement has caused to credit-worthy consumers. The White House also commented on the matter, stating that the Bulletin reduces consumer choice and limits auto dealers' ability to offer loans to consumers. If it is continued, Mr. Hensarling stated, then banks, credit unions and finance companies holding outstanding loans would face significant liability.

Committee Ranking Member Sherrod Brown (D-OH) denounced the vote and warned that preventing the CFPB from issuing future fair lending guidance could "permanently weaken federal anti-discrimination laws."

The measure must now go to the House.


Senator Brown's criticism of the Senate's action was phrased in dramatic language. His argument is flawed. According to Senator Brown, the Senate was acting to repeal what was intended to be mere "regulatory guidance," which essentially advises parties as to what the law actually is. Assuming that he is correct in this statement, then the repeal of the guidance has no legal effect whatsoever: the law remains what it is. If in fact the guidance did change the law in any material way, then the "guidance" was really a rulemaking in sheep's clothing, and the CFPB should have subjected the guidance to a formal rulemaking process. In short, either (i) repeal of the guidance is essentially legally meaningless or (ii) the guidance was illegally promulgated in violation of the Administrative Procedures Act.

In fact, the problem with the CFPB's lender guidance is even more profound. The guidance was issued based upon a study conducted by the CFPB that was widely criticized as being based on extremely flawed data. Whether one agrees with that view or not, the CFPB was able to publish the study without dissent or a meaningful internal vetting process, and the guidance was not put through a rulemaking and comment process. That Dodd-Frank provides the head of the CFPB with such unchecked authority is a fundamental flaw in the legislation; one that Congress now has the opportunity to correct.

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