The House is expected to vote Tuesday on a resolution that will protect many auto lenders that charge higher rates to racial minorities or to other protected groups. Worse, the resolution is possible because of a dubious reading of federal law which could potentially throw much of America’s consumer protection law into chaos during the next administration.
Jacked up interest rates
When someone wants to buy a car, car dealers often collect certain information about that customer and then relay it to several “indirect” auto lenders. The lenders then inform the dealer whether they are willing to loan money to the customer, and what interest rate they intend to charge.
Sometimes, however, lenders also allow the dealer to jack up this interest rate — so, for example, a lender may offer to lend money at a 3% interest rate, but the dealer tells the borrower that they can only get a 4% rate. Often, the lender pays a kickback to dealers that convince a customer to borrow at this marked up rate.
It is not illegal, at least under federal law, to upcharge customers this way. It is, however, illegal to “discriminate in any aspect of a credit transaction because of race, color, religion, national origin, sex, marital status, age, receipt of income from any public assistance program, or the exercise, in good faith, of a right under the Consumer Credit Protection Act.” So if a lender is, say, applying higher markups to people of color than they are to white customers with similar finances, then that is illegal.
In 2013, the Consumer Financial Protection Bureau (CFPB) published a bulletin entitled “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act,” which warned indirect lenders of their obligation to not discriminate and suggested several proactive steps “to address significant fair lending risks.” The resolution Congress is expected to vote on Tuesday seeks to invalidate that bulletin.
Congressional review shenanigans
The resolution disapproving of this bulletin already passed the Senate, and it is very likely to pass the House and to be signed into law by Donald Trump. It is far from clear, however, what practical impact such a resolution will have — and some of the possible outcomes are quite dire and could potentially lead to a great deal of chaos and uncertainty in a future administration.
The mechanism Congress will use to attack CFPB’s anti-discrimination bulletin is known as the Congressional Review Act, a 1996 law which permits Congress to pass a joint resolution preventing a “rule” promulgated by an agency from taking effect. But the Congressional Review Act also requires Congress to comply with tight deadlines if they want to invoke this procedure, and it is far from clear that Congress should be able to bring this process to bear against this CFPB bulletin.
To understand why, it is helpful to understand a few principles of American administrative law.
When Congress enacts a law, that law is known as a “statute,” and it is binding upon whoever Congress sought to bind with that statute (presuming, of course, that the statute is constitutional).
However, many statutes are ambiguous. Others lay out a broad policy objective and then delegate to federal agencies the task of filling in the details of how to achieve this objective. Agencies may promulgate rules that resolve ambiguities within a statute, or fill in gaps that Congress instructed the agency to fill. These rules also are binding upon individuals or businesses, and carry the full force of law. They are known as “regulations.”
Historically, the Congressional Review Act has only been used to block regulations.
But the CFPB bulletin is neither a statute nor a regulation. It is what is known as a “guidance.” A guidance often explains how an agency interprets its own regulations, or it may explain how the agency intends to enforce those regulations in a particular context. It does not, however, carry the force of law.
The Congressional Review Act has never been used to target a mere guidance, and it is far from clear that the Act is even allowed to be used in this way.
Nevertheless, Sen. Pat Toomey (R-PA) obtained an opinion from the Government Accountability Office (GAO) last year indicating that the Congressional Review Act could be used to target the CFPB bulletin on auto lending discrimination. With this opinion in hand, Congress is now poised to take an unprecedented action.
Salting the earth
The practical effect of the Congressional Review Act is twofold. One is that it allows the Senate to bypass the filibuster. If there were a large enough consensus in Congress that auto lenders should be allowed to discriminate, Congress could always repeal or amend the law banning discrimination by lenders. But such a bill is unlikely to receive 60 votes in the Senate. The Congressional Review Act eliminates the need to obtain a supermajority.
More importantly, however, any rule that is nuked by the Congressional Review Act “may not be reissued in substantially the same form” by a federal agency. So when the Congressional Review Act takes out a regulation, it also permanently strips away some of an agency’s power.
But it is not at all clear what this means when Congress disapproves of a mere guidance such as the CFPB bulletin. Recall that the bulletin does not have the force of law and does not impose any new legal obligations upon lenders, it is merely the CFPB’s interpretation of how existing statutes and regulations apply to certain lenders. If Congress takes out the guidance, those statutes and regulations will remain intact.
So what happens if Congress disapproves of the CFPB bulletin, and then CFPB tries at some future date to enforce the still-existing regulations against an auto lender? By disapproving of the guidance, will Congress create a special auto lender exemption to the regulations governing discrimination? Or will CFPB still be allowed to enforce its regulation so long as it doesn’t explain how it intends to do so in a future guidance?
And what of the requirement that a rule similar to the CFPB bulletin “may not be reissued in substantially the same form?” Does this ambiguous phrase prohibit any future effort to target the same auto lenders for discrimination, or can CFPB try to find another way to do so? What if CFPB issues a new, more lenient guidance that still targets particularly egregious cases of race discrimination? Is any effort by CFPB to fight discrimination by “indirect” auto lenders now out of bounds?
There are no clear answers to these questions (though the Gorsuched-up Supreme Court is likely to resolve them in the manner most unfavorable to consumers). Congress is about to raise a huge cloud of uncertainty over a significant area of federal law, and it is about to do so based on a dubious interpretation of the Congressional Review Act.
One other aspect of this unusual attack on the CFPB’s guidance is worth noting. Recall that the guidance on discriminatory auto lenders was published in 2013. Typically, when an agency promulgates a new rule, Congress has only 60 work days to invoke the Congressional Review Act. Thus, even if the CFPB bulletin does qualify as a “rule” that can be targeted by the Act, Congress missed its deadline.
But there’s a catch. The 60-day clock does not begin to tick until after an agency submits a report to Congress informing it of a new rule. Because the Congressional Review Act has never been applied to a mere guidance before — and because the GAO’s claim that a guidance is subject to the Act is quite novel — CFPB never submitted such a report in 2013.
There are many, many agency guidances, published by dozens of federal agencies, on hundreds or even thousands of different topics. It is unlikely that the agencies that published these guidances submitted reports to Congress when many — or even any — of them were published.
Congress, in other words, could start hunting for guidances stretching back to the Clinton administration, and target them with the Congressional Review Act. Each time they do so, moreover, Congress will strip a federal agency of some unknown portion of their power to protect consumers, remedy discrimination, or take some other action that the present Congressional majority finds distasteful.
But no one will know just how much power is taken away every time, and it could take decades to work through all of the lawsuits that could arise.
In striking a blow against an obscure CFPB document, in other words, Congress is about to throw much of American law into disarray. Consumers won’t know what their rights are. Businesses won’t know how to comply with the law. And agencies won’t know what they are allowed to do.
But, hey, it’s a great day if you want to charge higher interest rates to minority car buyers.