In May of this year the U.S. House followed the Senate in passing a measure that effectively ends Obama-era guidance aimed at limiting dealerships' retail margins on auto loans. The Consumer Financial Protection Bureau issued the guidance in 2013 on the basis that flexibility in retail lending margins may have led to minority borrowers being charged more on loans as compared to other similarly situated borrowers.
The House’s vote effectively brings to an end a contentious era of policy and enforcement by the CFPB. The guidance is arguably one of the most controversial policies implemented by the bureau since its creation under President Barack Obama in the wake of the 2008-09 financial crisis. The CFPB also used its authority to pursue enforcement actions against lenders, reaching settlement agreements that appeared to effectively solidify the CFPB guidance, a result that many observers found to be unjust.
For dealers, the rescission of the CFPB guidance likely inspires relief. Many dealers have received audit requests and even accusations of potential discrimination from lenders attempting to comply with the guidance. Others have made changes to internal policy, adopting the NADA’s voluntary fair credit compliance program or moving to “flats.”
The repeal of the guidance therefore raises an important question for dealers: are they out of the woods now? For California dealers, and those in several other states, the answer is not yet. There are state laws that may allow state and local prosecutors, and even private plaintiffs, to pursue their own versions of the CFPB’s enforcement actions. This article explores what kind of actions these groups could take, the hurdles they could face, and what California dealers should do to decrease their risk.
The history: CFPB’s guidance and enforcement actions
On March 21, 2013, the CFPB issued guidance to retail lenders stating that they were liable for what they described as “unlawful, discriminatory pricing” by auto dealers through dealer markups of auto loans. Lenders typically authorize a specific interest rate that dealers may offer to consumers applying through the dealers for a car loan, and allow those dealers to increase the final rate offered and keep a portion of the additional rate to compensate the dealers for their role in facilitating the loan. The CFPB in its guidance asserted that dealers’ ability to charge this “markup” may lead to discriminatory pricing of loans in that dealers may charge higher rates of minority borrowers compared to other borrowers who are similarly situated.
The CFPB does not have the authority to regulate directly auto dealers in most circumstances, but does have broad authority to investigate and regulate lenders who offer auto loans. For this reason the CFPB’s guidance is frequently referred to as indirect auto lending guidance in that it does not place any direct limits on auto dealers but does so in effect by seeking to regulate the relationship between lenders and auto dealers. This has
The basis for the CFPB’s allegation that dealers have engaged in discriminatory lending is controversial. Neither auto dealers nor lenders record the race of loan applicants. The CFPB therefore could not directly compare rates of borrowers based on their self-reported race. Instead, the CFPB performed a study that relied on assigning races to borrowers based on probabilities determined by their last names and zip codes. Multiple organizations have challenged both the methodology the CFPB used and its results.
In its guidance to lenders, the CFPB put out several recommendations for policies that lenders should impose on auto dealers. These included: “imposing controls on dealer markup and compensation policies, or otherwise revising dealer markup and compensation policies, and also monitoring and addressing the effects of those policies in the manner described below, so as to address unexplained pricing disparities on prohibited bases; or eliminating dealer discretion to mark up buy rates and fairly compensating dealers using another mechanism, such as a flat fee per transaction, that does not result in discrimination.”
The CFPB also brought several enforcement actions against lenders on the basis of this guidance. Several of these cases concluded with the lenders agreeing to settlement agreements with the CFPB, while not admitting to any wrongdoing. These agreements required the lenders to place restrictions on dealers flexibility in offering interest rates that differ from those offered by the lender. Critics have alleged that these enforcement efforts were simply a means to regulate auto dealers without putting the guidance through the regulatory process.
NADA has fought to protect dealers from these regulatory efforts both at the political level and the compliance level. Most important, the NADA published a recommended voluntary fair credit compliance program, which is based on a program once approved by the U.S. Department of Justice. This program aims to preserve dealers to offer credit on terms that are tailored to a borrower’s needs, while ensuring that credit is not based on protected status.
Are dealers out of the weeds?
With the rescission of the CFPB guidance, on the federal level, lenders, and dealers by extension, are unlikely to see continued enforcement or regulation in this area by the CFPB. However, Congress acted pursuant to its authority to oversee regulatory action, but it did not amend the Equal Credit Opportunity Act (ECOA) or other underlying federal laws that gave rise to the CFPB’s enforcement policy in the first place. As such, it remains possible to argue that the actions complained about by the CFPB continue to violate the law, regardless of the status of the enforcement guidance at the CFPB. However, under the current administration it is unlikely that the federal agencies, such as the Department of Justice or FTC, would bring enforcement actions, despite their authority to do so.
In the meantime, dealers should weigh the risks that they face not from federal authorities but from state, local, and private enforcers. Unlike at the federal level, it is already clear that state and local prosecutors may rely on state law to bring enforcement actions. For example, the California Unruh Act broadly prohibits California businesses from engaging in acts that discriminate on the basis of certain protected statuses, including race and gender. Government enforcers have used this law to pursue a wide variety of cases, including pursuing discrimination actions against businesses.
In addition, private plaintiff’s attorneys may also be able to pursue similar claims against dealers. For example, actions could be filed under the California Consumer Legal Remedies Act, which gives private plaintiffs broad authority to make claims against businesses for violations of state or federal law (including, conceivably, the ECOA).
While enforcers will be able to find a legal basis for discrimination claims in the states, the factual issues will present more challenges. First, and foremost, based on our experience, the vast majority of dealers do not engage in discriminatory lending, whether intentional or unintentional. There is vast competition in California and the nation, and car buyers are extremely diverse. In order to compete for business dealers offer credit on fair and competitive terms.
Second, as discussed above, neither dealers nor lenders maintain records regarding the race of credit applicants. Enforcers would therefore also need to perform studies of dealers’ or lenders’ records to identify borrowers who they alleged were treated in a discriminatory manner, as they cannot be identified directly from credit applications or retail installment sales contracts. Dealers will likely therefore have both prior knowledge that an investigation is taking place and the ability to directly challenge the study methods relied upon by the prosecutors.
Third, the kind of study a prosecution would require would most likely be expensive and its outcome uncertain. In the absence of specific allegations, discussed in more detail below, public prosecutors would need to convince their offices to subpoena dealers or lenders for their records and then invest in experts to study the records to find any discrimination. This would be a significant hurtle to such a prosecution.
Finally, private attorneys do not have the investigatory authority to subpoena dealer or lender records without first filing a lawsuit in a matter. Even once a lawsuit is filed, both the named party and any third parties, such as lending banks, will have the ability to use legal process to resist such subpoenas.
What should California dealers do?
It is important for dealers to understand the risks that they face after the rescission of the CFPB’s guidance. First, the CFPB is unlikely to pursue enforcement actions under this administration. The same is likely true of other agencies that have direct authority over dealers, such as the FTC.
At the state level, though, risk still exists for dealers. The above discussion made clear that both public and private enforcers will face a steep hill in bringing and proving such claims not due to legal issues but the factual issues.
There is an important caveat that dealers should know, however. If individual customers go to either public or private enforcers with claims that they themselves were discriminated against in lending, it is far more likely that the dealer could face an investigation, enforcement action or lawsuit. Such complaints would help public prosecutors in identifying a target, and give private attorneys a plaintiff to bring a lawsuit and lead to discovery.
Dealers should also be aware that the political climate will increase the incentives for both public and private attorneys to bring these claims. The political atmosphere in California is largely anti-Trump administration. Plaintiffs’ attorneys, state prosecutors, and local prosecutors from more political left counties will therefore feel incentive to bring lawsuits with the argument that the Trump administration has abdicated its regulatory role.
For these reasons, California dealers should continue to focus on treating all customers fairly, no matter their race, gender or other characteristics. That is both a requirement of the law and the right thing to do.
Dealers should also consider adopting or continuing to use the NADA’s fair credit compliance program. The program maintains dealers flexibility in lending while also both preventing the possibility of discrimination and providing meaningful records dealers can use to prove that their lending practices have been fair and non-discriminatory. More information about the program is available at nada.org
 California Civil Code section 51(b).
 California Civil Code section 1750 et seq.