On Monday, President Donald J. Trump signed into law the Congressional S.J. 57 resolution repealing the Consumer Financial Protection Bureau’s (CFPB) guidance on dealer markup. Originally issued in March, 2013, the auto lending guidance quickly received negative feedback. In fact, the ruling caused several finance sources to either switch to a flat-fee compensation model or enforce lower caps on dealer markups. The ruling also prompted the CFPB to impose consent orders with several institutions resulting in millions of dollars in fines.
The retail automotive industry is cheering this move, which began five months ago when the Government Accountability Office said Congress had the power under the Congressional Review Act (CRA) to overturn the CFPB guidance. But, before you start thinking the good old days are back, consider what started the industry on this path.
The CFPB’s original guidance was designed to inform lenders that it would begin enforcing the fair lending requirements of the Equal Credit Opportunity Act (ECOA) using a theory on disparate impact. This theory refers to practices that adversely affect protected classes of individuals, even though employer rules and practices are meant to be neutral. The CFPB used this theory to make the argument that dealer markup practices could result in unintentional discrimination during the credit process, and must therefore be reined in.
While the CFPB can no longer use disparate impact theory to force lenders to reduce dealer markup, the ECOA and its fair lending requirements remain in full effect. Other federal, state and local compliance regulations also remain, which prompts me to remind our clients that remaining in compliance is still in the dealership’s best interest. And, it’s highly unlikely that lenders who invested millions of dollars into comprehensive compliance platforms will suddenly reverse all those process changes. Continue reading