Congress Repeals CFPB Auto Finance Guidance: The Compliance Implications for Auto Dealers

On May 21, 2018, President Trump signed legislation passed by Congress to repeal the Auto Finance Guidance issued by the Consumer Financial Protection Bureau (“CFPB”) in March 2013.  The legislation prohibits the CFPB from issuing similar rules or regulations without first obtaining Congressional approval and is a win for auto dealers and lenders everywhere.
 
The Guidance was an attempt by the CFPB to do an end run around the agency’s lack of authority over auto dealers.  By using flawed statistics to claim that dealers and the lenders who bought their consumer finance agreements charged higher APRs (the sell rate) to protected classes of people (race, color, religion, national origin, sex, marital status, age or because a person receives public assistance), the CFPB alleged lenders (over which they do have supervisory and enforcement jurisdiction) violated the Equal Credit Opportunity Act (“ECOA”).  Their theory was a “disparate impact” credit discrimination where there is no need to show intent to discriminate, only a negative result in credit terms to protected persons.  Disparate treatment requires showing an intent to discriminate.
 
The Practical Effect of Repealing the Guidance
 
So, what does the repeal of the Guidance mean for dealers?  Is “disparate impact” credit discrimination no longer prohibited?  Have ECOA standards for showing discrimination been relaxed?  Can dealers let up on documenting their lack of variable pricing to customers from which a disparate impact can be inferred?
 
The answer is no.  ECOA is still the law and the Guidance merely consisted of the CFPB’s interpretation of how rate participation was allegedly abused to cause a disparate impact resulting in higher APRs on protected persons.  The U.S. Supreme Court declined in 2015 to rule that “disparate impact” is not a viable cause of action under ECOA.  But it will be another agency, not the CFPB, or a private plaintiff that brings the charge.  What are some of those agencies?
 
Start with the U.S. Department of Justice (“DOJ”).  The DOJ could make assertions like those in the Guidance, either alone or in concert with federal banking regulators or the FTC, although the 2015 U.S. Supreme Court case made the standard of proof higher.  Nevertheless, lenders will continue to be sensitive to the issue and many will continue to want dealers to demonstrate to them that they have a Fair Lending Policy in place (such as the NADA/NAMAD/AIAD Fair Credit Compliance Policy and Program) (“NADA Program”) and can document a “legitimate business reason” for varying a standard dealership rate participation amount to a lower rate because a legitimate business reason is a defense to a disparate impact charge.
 
The FTC can refer ECOA violation charges to the Department of Justice to bring a civil action for actual or punitive damages and injunctive relief. Actual damages and punitive damages are not to exceed $10,000 per violation.  Class action damages are available up to the lesser of $500,000 or 1% of the dealer’s net worth.
 
Twenty state Attorneys General (“AGs”) indicated they will continue to enforce the Guidance as written in their states as well.  Those AGs have direct supervisory and enforcement jurisdiction over your dealership and the Dodd-Frank Act which established the CFPB gives AGs the authority to enforce federal laws such as ECOA as well as state laws.  States also have anti-discrimination laws that may be broader than ECOA in terms of the categories of protected persons and provide a lower standard of proof to make a disparate impact credit discrimination claim.  State law damages are in addition to federal law damages such as those permitted by ECOA.  Most state laws also require a defendant to pay the plaintiffs’ attorney’s fees.
 
Consumer groups are also taking up the cause.  The AFL-CIO and a group of pro-consumer organizations such as the Committee for Better Banks are sending letters to and appearing at Santander Bank’s annual meeting to press the bank to end dealer markups to prevent racial discrimination in auto lending.  It can be expected that they will send similar letters to other banks and bank regulators and press a legislative agenda both in Washington and in the statehouses.
 
“In addition to harming consumers, the racially disparate impact of indirect vehicle lending creates risks to the company’s reputation and exposes the company to potential legal liability,” the AFL-CIO and its partners said in a draft letter provided to Bloomberg News. 
 
The legal liability can also come from plaintiffs’ class action lawyers.  Aggrieved consumers have the right to bring actions under ECOA for credit discrimination of any type.  While the burden of proof may be higher in the aftermath of the Supreme Court’s 2015 ruling, the costs to defend a class action can be staggering and a successful plaintiff can recover its attorney’s fees and court costs in addition to the damages referenced above.
 
What’s a Dealer to Do?
 
First of all, it is important to understand that the liability risk is not diminished by the repeal of the Auto Finance Guidance.  The repeal did not affect the requirements of ECOA and the FTC, State AGs, and other parties described above can still bring an action against a dealer for disparate impact credit discrimination if they have reason to believe you are not pricing all customers in a non-discriminatory manner.  Lenders will continue to monitor and audit you as well.
 
If you have established and implemented the NADA Program, continue to monitor and document all finance transactions and note the legitimate business reason any transaction’s APR falls below the standard dealership participation rate.  Keep this documentation in the deal jacket as it will be your best defense if a lender or regulator seeks an audit.  Be prepared to defend your legitimate business reasons for giving some customers sell rates that are marked up less than other customers.
 
You can’t legally keep a record of the race or other protected characteristics of a buyer, but you can use the NADA Program to show you treat all persons the same.  You give them what you establish as the dealership standard rate participation and adjust it downward (never upward) only when there is a legitimate business reason to do so.  The NADA Program lists several legitimate business reasons but there are others you should review with your attorney and include them on the list if acceptable as well.
 
If you have not implemented a fair lending program, now would be a good time to do so.  The NADA Program is available for download online at https://www.nada.org/WorkArea/DownloadAsset.aspx?id=21474838176. 
 
The NADA Program contains a model policy and forms to use. NADA provides online training assistance to its members as well.  So do third party compliance providers who may also be able to help you implement your program and policy.  With entities such as the AFL-CIO pressuring banks and regulators, it is important that you be able to defend your practices and the NADA Program is the best way I know to do so.
 
If you have never received a lender’s fair credit audit request or an inquiry by a regulator, consider yourself fortunate.  It is very likely to happen at some point in the future. By having the NADA Dealer Participation Certification Form in your deal jackets, you will stand an excellent chance of not having to go through the time and effort that many dealers did in the aftermath of the CFPB’s issuance of the Guidance when lenders were all over dealers about “disparate impact” and compliance. 
 
It was great to see the Congress repeal the Guidance but don’t get complacent about compliance.  Do the right thing and follow your anti-discrimination policy and document your doing so.  A little time now can save a lot of time and money down the road.