The banking industry won a small victory this month when the House voted to nullify Consumer Financial Protection Bureau guidance that had led to recent auto lender settlements, but the real battle over the bill and its potential impact is just beginning.
The bill — authored by Reps. Frank Guinta, R-N.H., and Ed Perlmutter, D-Colo. — would force the CFPB to rescind its 2013 bulletin that had told auto lenders to change practices for compensating dealers to avoid fair-lending violation from pricing markups. The legislation, which passed with significant Democratic support, would require the agency to study the policy and then revise the guidance.
But the impact of the bill could be broader than forcing the bureau back to the policy drawing board. Since the bulletin was seen as the basis for recent fair lending enforcement actions — against Ally Financial and other companies — observers say the bill could cool those enforcement efforts. Yet the agency could also respond by saying its enforcement authority was still intact, allowing it to target more firms.
"The real impact of H.R. 1737 is to chill the enforcement of anti-discrimination laws and to convince regulators to stop their enforcement of them," said Chris Kukla, senior vice president at the Center for Responsible Lending. "So even though the mechanics of the bill look the way that they do, … the clear intent of the bill is to get regulatory agencies, especially CFPB, to stop their enforcement actions."
On the surface, the bill's chances of clearing the Senate and being signed by President Obama are slim. But unlike other congressional efforts to restrict the CFPB, supporters of the bill think they at least have a chance. They note the 65 House Democrats who were among the cosponsors, and the 88 who voted in favor. (The bill passed by a vote of 332 to 96.)
In the Senate, 11 Democrats were among lawmakers signing a 2013 letter to the CFPB questioning the guidance and whether it was meant to upend dealer price discretion. Meanwhile, even though the administration released a statement opposing the bill, it did not outright threaten a veto.
"There's already a base of 11 Democrats in the Senate who previously questioned the CFPB about its indirect auto lending bulletin. I know there's a big chasm between signing a letter and voting against your president but there is a starting point for this bill," said Bill Himpler, executive vice president of legislative affairs at the American Financial Services Association. "We're pushing to get this bill through this session. And if it doesn't get done this session, we're not letting up and we will continue to see that it gets on the president's desk as soon as possible."
It will be an uphill climb. Isaac Boltansky, a policy analyst at Compass Point Research & Trading, said he predicts the bill has a 20% likelihood of passing the Senate, which is actually "a slightly higher probability of becoming law" than his predictions on other CFPB-related bills coming out of the House.
"We remain pessimistic of the bill's passage in the Senate and therefore we expect the CFPB to continue its slow but steady march to limiting auto dealer discretion through targeted enforcement actions against lenders," he said.
The 2013 bulletin had warned indirect auto lenders that they could be cited for unintentional discrimination for having policies that allow dealers to mark up the wholesale rate on a loan — a common compensation practice in the industry. But the Guinta-Perlmutter legislation would require the agency to run such guidance through a more public process, which would include holding a comment period, performing a cost-analysis study and having it reviewed by other federal agencies.
The agency's targeting of auto lenders over dealer price discretion has emerged as one of the most contentious policy issues in the bureau's young history. In more recent enforcement actions against Fifth Third Bank and American Honda Finance Corp., the lenders agreed to lower the interest rate cap it sets with dealers in order to settle with the CFPB.
The bill does not explicitly weaken the CFPB's enforcement authority, and it is unlikely that the legislation would do anything to affect the actions the bureau has already taken.
Still, some observers said it could convince the agency to hold back in targeting more firms.
The auto lenders currently under a settlement are "losing market-share now" and unless there is something holding the agency back "there's a belief that the CFPB will go after all of the indirect auto lenders," said Boltansky. "So it won't be long until there is an even playing field."
But, he added, "if this House bill becomes law, then there's a period of time where everything pauses and those lenders who've already settled will be at a disadvantage and an uneven playing field" will remain.
Supporters were buoyed by Democrats who voted in favor of the legislation.
The National Automobile Dealers Association "is encouraged by the strong bipartisan support H.R. 1737 received, and we view the House vote as a clear indication of the substantial support that exists among both parties for protecting consumers when it comes to auto financing," said Jared Allen, a spokesman for the NADA.
Since the bill's passage in the House, Republicans on the House Financial Services Committee released a report Nov. 24 accusing the agency of using a "flawed" statistical method for taking "misguided and deceptive" actions against indirect auto lenders.
"This report helps a lot as far as efforts to move H.R. 1737 forward," Himpler said. "I hope this report will give senators pause and give them the facts they need in order to give us a vote on this so that we can get a fair shake out of the CFPB's Office of Fair Lending."
Others, however, said the report will simply be viewed by most Democratic senators as another Republican attempt to unwind the CFPB.
"That report truly makes it seem like an attack on the CFPB rather than an auto dealer issue," Boltansky said. "And anything with CFPB as trouble in the headline is going to upset senators like Elizabeth Warren."