The 2013 Consumer Financial Protection Bureau (CFPB) regulation which held financial institutions responsible for potential discriminatory lending practices at dealerships was repealed by the President on Monday. The original 2013 CFPB bulletin was intended to address the potential for racial discrimination at dealerships by encouraging lenders to cap interest rate markup at 150 basis points, as opposed to the industry standard of 250 basis points. This was all based on disparate impact theory, which 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.
During its five-year existence, the directive prompted the implementation of flat fees as well as millions of dollars in fines charged to financial groups in the form of consent decrees. The root of the CFPB guidance took issue with the practice of dealers placing the buyer into a higher-interest deal than the lender had originally approved, and then the dealership collects the difference.
Thanks to some fancy footwork by Senator Pat Toomey (R-Pa.), who asked the Government Accountability Office (GAO) to review the CFPB’s guidance, and Senator Jerry Moran (R-Ks) for putting S.J. 57 onto the floor for a vote, the regulation, and its guidance, has ceased to exist. And, if you ask some, all is now right with the world.
Groups on many sides of the situation took issue with the ruling. Auto industry trade groups argued that the bureau used its guidance to indirectly regulate the activities of dealers, which are mostly exempt from the bureau’s oversight under the Dodd-Frank Act. In addition, they argued that the guidance would ironically have an adverse effect on the groups of people it was trying to protect by limiting a dealer’s ability to secure competitive funding. Banking and financial groups reaffirmed their commitment to fair lending practices, saying they have been regulated for years and were not to blame for dealer actions that may or may not result in unintentional discrimination.