Republican members of the House Financial Services Committee recently released a report, prepared by the Republican Staff of the Committee, titled “Unsafe at Any Bureaucracy, Part III: The CFPB’s Vitiated Legal Case Against Auto Lenders.” This is the third Republican Staff report examining the automotive ECOA enforcement actions of the CFPB with respect to what its characterizes as a “dealer markup” of the wholesale buy rate established by the assignee of a retail installment sale contract (“RISC”). We previously wrote about the first investigative report in this series, which was titled “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending.” The latest report discusses two subjects.
The “Vitiated Legal Case”
The third report is devoted principally to “demonstrat[ing] that under” the Supreme Court decision in Inclusive Communities, “if the CFPB were to rely upon the legal theory it deployed in previous enforcement actions against auto financiers, its claims would not survive judicial scrutiny.” As a threshold matter, the report asserts that disparate impact claims are not cognizable under the ECOA because the ECOA does not contain “results-oriented language” like that which the Supreme Court relied upon in holding that disparate impact claims are cognizable under the Fair Housing Act (“FHA”). The ECOA speaks instead in terms of discriminating against an applicant on a prohibited basis. The report further asserts that Inclusive Communities interpreted the adoption of the FHA Amendments of 1988, which it said contemplated the existence of disparate impact liability, as Congressional ratification of prior appellate decisions holding that disparate impact claims are cognizable under the FHA. By way of contrast, however, the report notes that “Congress has made no such amendments to ECOA.”
The staff report also asserts, and contains a robust discussion of, additional reasons why the Bureau could not establish a prima facie case of disparate impact liability against an assignee of RISCs. Specifically, for reasons discussed therein, the report concludes that: (i) the asserted “discretion” to “mark up” the wholesale buy rate is not a specific “policy” upon which a disparate impact claim may be based; and (ii) the CFPB could not meet the robust causality standard that Inclusive Communities reiterated and expounded upon in its discussion of the safeguards against abusive disparate impact claims. Finally, the report suggests that, “[b]y asking only whether a minority [buyer] paid more than the non-Hispanic white average, the CFPB does not accurately assess whether he or she was actually harmed by the disparate impact.”
The report’s discussion of the “vitiated legal case” against assignees of RISCs concludes with the observations that “[f]uzzy logic and false comparisons are unfortunately prevalent in the” Bureau’s ECOA auto enforcement actions, as is a “lack of rigor that leads to unsupported and unreliable conclusions.” We have written previously about some of the issues discussed in the report, including in our articles on the Supreme Court decision in Inclusive Communities, “Auto Finance and Disparate Impact: Substantive Lessons Learned from Class Certification Decisions,” and a February 2006 Business Lawyer article titled “The ECOA Discrimination Proscription and Disparate Impact – Interpreting the Meaning of the Words That Actually Are There.”
The Auto Finance Larger Participant Rule
The press release issued by the Republican members of the Committee highlights the final subject covered by the report. Titled “CFPB Director Failed to Heed Attorney Advice on Auto Lending Rule, Likely Violated Federal Law,” the press release asserts that the Bureau may have violated the Administrative Procedures Act in adopting the larger participant rule for the automobile financing market (the “LPR”). Quoting from the Supplementary Information accompanying the proposed LPR, the report states that the proposed volume threshold for determining “larger participant” status was “based upon ‘quantitative information on the number of market participants and their number and dollar volume of annual originations’ taken from Experian’s AutoCount database.”
According to the report, during the comment period for the proposed LPR, the Bureau received requests for a list of the companies that it believed would qualify as “larger participants” under the proposed rule, and “‘a number of comments pertaining directly or indirectly to the Experian list.’” Believing the Experian AutoCount data, and any information derived from it, to be proprietary information that it was not at liberty to disclose, the Bureau did not respond with the requested information.
The report indicates, however, that after the comment period ended, Experian informed the Bureau that it had no objection to: (i) releasing the names of the entities that the Bureau estimated would be “larger participants” under the proposed volume threshold for larger participant status; and (ii) the relative market share for each listed entity. Relying upon internal CFPB documents obtained by the Committee, the report asserts that the Bureau did not follow an internal legal recommendation to reopen the comment period, publish this information and request comments with respect to it before proceeding to adopt a final LPR for the automobile financing market.
