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The CFPB "indirectly" regulates lending through auto dealers.

I. Introduction

On March 21, 2013, the Consumer Financial Protection Bureau (CFPB) signaled that auto finance would be an upcoming "fair lending enforcement target" (1) in a Bulletin entitled Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act (Bulletin). (2) The Bulletin announces CFPB concerns about a significant risk of pricing disparities in auto finance based on factors prohibited by the Equal Credit Opportunity Act (ECOA) (3) from being considered in credit extension decisions such as race and national origin. (4)

To date, the CFPB has pursued enforcement actions under the Bulletin against at least four banks, including a settlement with Ally Financial, Incorporated, and Ally Bank (collectively, "Ally"). (5) Regulatory filings by Toyota Motor Credit Company on September 13, 2013, and American Honda Finance Company on August 19, 2013, disclosed that the CFPB and DOJ have also sought information from them related to possible violations of the ECOA. (6)

While the worthiness of the CFPB's goal to ensure fair lending in auto finance remains unquestioned, Congress and the auto finance industry have raised serious questions about the Bulletin and the agency's approach to its fair lending objective. (7)

Accordingly, Part II of this Note provides a background to the CFPB's role in fair lending, its concerns with indirect auto financing, and its suggested solutions. (8) Part III then discusses obstacles to the effective implementation of the CFPB Bulletin. (9) Part IV proceeds to address potential problems with the Bulletin's enforcement, (10) and Part V examines the goals of the CFPB guidance and the impact that achievement of those goals may have on the auto loan market. (11) Finally, Part VI concludes by suggesting that by ignoring the previously understood meaning of the ECOA and issuing its Bulletin as guidance, the CFPB may adversely change the standard of lending through auto dealers and indirect lenders without fully understanding the crippling effects such change may have on the auto loan market. (12)

II. Equal Credit in Auto Lending

A. Relevant Laws and Agencies

Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (13) (Dodd-Frank) in the wake of the 2008 financial crisis. (14) Dodd-Frank created the CFPB in 2011 to implement and enforce federal consumer financial laws in order to promote fairness, transparency, and competition in markets for consumer financial products and services. (15)

In furtherance of this purpose, Dodd-Frank granted ECOA rulemaking authority to the CFPB over creditors within its jurisdiction. (16) The ECOA makes it "unlawful for any creditor to discriminate against any applicant ... on the basis of race, color, religion, national origin, sex, marital status, or age (provided that the applicant is old enough to contract)." (17) Regulation B (18) implements the ECOA for the purpose of promoting the availability of credit to creditworthy applicants without regard to such prohibited factors. (19)

Even though the CFPB is tasked with enforcing the ECOA, Dodd-Frank grants auto dealers a special exclusion from the rulemaking, supervisory, and enforcement authority of the CFPB. (20) The exclusion was included as an amendment championed by House Financial Services Committee member, John Campbell, and former Senator Sam Brownback. (21) Senator Brownback, with hearty support from auto lobbyists, took the position that auto dealers were "main street" retailers who were not responsible for the financial crisis and should, therefore, not be regulated by Dodd-Frank--as opposed to Wall Street bankers who played a significant role in the 2008 financial collapse. (22) The amendment was controversial and was opposed by President Barack Obama and both namesakes of Dodd-Frank: Representative Barney Frank and Senator Christopher Dodd. (23) Consumer advocates also opposed the auto dealer exclusion citing the disparities in the interest rates afforded to African-American and Hispanic borrowers. (24)

B. Indirect Auto Lending and Dealer Compensation

The Bulletin targets a fair lending concern pertaining to a common auto dealer compensation practice whereby an auto dealer is compensated for assisting a customer with financing a car purchase through a third-party lender. (25)

When consumers want to purchase a vehicle on credit, they may apply for a loan directly with a financial institution, but more often an auto dealer will collect the consumer-applicant's relevant credit information and act as a middleman between the applicant and the lender. (26) In these transactions, an auto dealer typically collects a credit applicant's information and offers that information to creditors or, "indirect auto lenders." (27) The indirect auto lenders can then either decline to become involved in the transaction or, alternatively, they can provide the dealer with a risk-based minimum interest rate at which the lender is willing to offer the loan to the applicant customer. (28) The minimum interest rate a lender is willing to offer an applicant is called the "buy rate." (29) Traditionally, auto lenders allowed dealers to mark up the interest rate offered to customers above the minimum buy rate. (30) The indirect lender would then compensate the dealer for obtaining the loan based on the increased interest revenues the lender received at the higher rate secured by the auto dealer. (31) This compensation practice incentivizes dealers to secure optimal rates for lenders. (32) Compensation based on increased interest revenues form dealer markups is also called "reserve" or "participation" (33) compensation. (34)

In March 2012, the Center for Responsible Lending (CRL), a consumer advocate group, condemned the practice of dealer markup compensation. (35) The CRL's research estimated that, in 2009, consumers paid an estimated $25.8 billion over the lives of their loans because of dealer markups. (36) Additionally, the research indicated that African-American borrowers paid more for their financing through dealers than similarly-situated Caucasian borrowers. (37) However, despite the empirical evidence of the negative effects of dealer markups, even the CFPB concedes that auto dealers' facilitation of the auto loan process is valuable and, therefore, deserves compensation. (38)

C. The CFPB Characterization of Indirect Lender Liability

The Bulletin asserts that dealer reserve compensation, and especially dealers' discretion in setting interest rates, leaves consumers vulnerable to discrimination. (39) Therefore, the Bulletin cautions indirect lenders that they may face liability under the ECOA and Regulation B should they engage in discriminatory lending practices. (40)

Before the Bulletin's issuance, indirect lenders were not aware of potential liability under the ECOA for dealer compensation practices because Regulation B was previously understood as a safe harbor limiting a creditor's liability for another creditor's violations. (41) Regulation B provides that "a person is not a creditor regarding any violation of the ECOA or Regulation B committed by another creditor unless the person knew or had reasonable notice of the act, policy, or practice that constituted the violation before becoming involved in the credit transaction." (42) The Bulletin, however, states that it is incorrect to assume that creditors are not liable under the ECOA for disparities in interest rates caused by the dealer reserve compensation policies. (43)

The Bulletin reminds auto lenders that it is illegal for a "creditor" to discriminate based on a prohibited factor under the ECOA. (44) Under the ECOA, a "creditor" is defined as "any person who in the ordinary course of business, regularly participates in a credit decision, including setting the terms of the credit." (45) The term "creditor" also includes "a person who ... regularly refers applicants or prospective applicants to creditors, or selects or offers to select creditors to whom requests for credit may be made." (46) According to this definition, auto dealers are creditors for the purposes of the ECOA. (47)

Finally, the Commentary to Regulation B provides that "creditor" includes all persons participating in the credit decision, "includ[ing] an assignee or a potential purchaser of the obligation who influences the credit decision by indicating whether or not it will purchase the obligation if the transaction is consummated." (48) Therefore, the Bulletin designates indirect auto lenders as "creditors" and while the CFPB recognizes a "continuum of indirect lender participation in credit decisions," standard practices of indirect auto dealers would likely constitute participation in a credit decision under ECOA and Regulation B. (49) The Bulletin also provides that "[a]n indirect auto lender's markup and compensation policies may alone be sufficient to trigger liability under the ECOA if the lender regularly participates in a credit decision and its policies result in discrimination." (50)

D. CFPB Suggestions for Limiting Lender Liability Exposure

The CFPB listed several relatively simple suggestions for how indirect auto lenders might limit their liability under the ECOA, including creating an up-to-date fair lending policy statement, regularly training employees in fair lending, and continuously monitoring for policy compliance. (51) Other suggestions, such as regular analysis of all loan data for potential disparities, are much more onerous to carry out, especially since the Bulletin neglects to include a threshold or standard for measuring disparities that would indicate non-compliance with the ECOA. (52)

Additionally, the Bulletin indicates that if indirect lenders want to retain dealer markups, those lenders might be required to not only monitor lending and identify disparities, but also to commence prompt corrective action against dealers. (53) Such corrective action includes restricting or eliminating the dealer markup policies, excluding dealers from future transactions, and promptly remunerating affected consumers if disparities are identified. (54)

Since the Bulletin was issued in March 2013, the CFPB has further elaborated on its suggestions for alternate compensation policies. (55) The agency clarified that the Bulletin does not mandate flat fees or any other particular method of dealer compensation. (56) It also expanded its suggestions for alternate dealer compensation methods to include a fixed percentage of the amount financed. (57)

The Bulletin warns that the CFPB will continue to closely review indirect auto lenders' operations and will use all appropriate regulatory tools to assess whether supervisory or enforcement action may be necessary to protect consumers. (58) In remarks at the CFPB Auto Finance Forum, CFPB Director Richard Cordray reaffirmed the agency's vow to root out discriminatory lending practices in auto lending, including those "fair in form but discriminatory in operation." (59)

E. Overview of the Bulletin's Reception

The Bulletin sparked a great deal of commentary from the auto and lending industries and Congress. (60) The National Automobile Dealers Association (NADA) and the National Association of Minority Auto Dealers (NAMAD) issued a joint statement questioning the CFPB's approach and raising concern that the Bulletin will increase the cost of auto financing by impairing competition in the auto-lending market. (61)

Additionally, in letters to the CFPB, (62) several House Republicans and Democrats, in both separate and bipartisan efforts requested more transparency in the analysis that led the CFPB to conclude that dealer reserve practices were discriminatory or potentially discriminatory. (63) In response to the inquiries, the CFPB restated its goal of eliminating discrimination resulting from the dealer reserve practice, but provided little more to elaborate on its use of proxies. (64)

Perhaps, the greater problem with dealer markups is the lack of public awareness and disclosure requirements. (65) There is evidence that the public is largely unaware of dealer markups. (66) In 2010, however, the Federal Reserve Board (FRB) eliminated similar compensation for mortgage loan originators, finding the practice unfair to consumers under the Fair Trade Commission Act and finding that disclosure requirements alone were not enough to protect consumers. (67)

However, the FRB first issued a formal rule, (68) subject to comment and analysis required by the Administrative Procedures Act (APA) when it changed the method of compensation for mortgage loan originators. (69) The formality of the rule and the jurisdiction of the FRB made the rule applicable to anyone who might engage in work as a loan originator. (70) Even the CRL, through its criticism of dealer markup compensation, urged the Federal Trade Commission (FTC) to use its rule-making authority to change dealer compensation in auto lending. (71) Even though the CRL sought to classify dealer markups as "unfair and deceptive practices," it did not fathom that a change in the practice would come out of an interpretive letter rather than APA rulemaking. (72)

The CFPB has a well-earned reputation for aggressive enforcement of federal regulations. (73) While the Bulletin demonstrates the CFPB's continued zealous protection of consumers, it also illustrates the failings of pursuing lofty regulatory ambitions without a stable foundation from which to launch such a campaign. (74)

III. Obstacles To Implementation Of The CFPB Bulletin

A. CFPB Jurisdiction

The CFPB has authority to supervise and enforce federal consumer financial laws regardless of whether the institution is a depository or non-depository institution. (75) The agency has primary enforcement authority over insured depository institutions and credit unions with assets over $10 billion, while those with assets less than $10 billion are subject to enforcement by their primary federal regulator. (76) While the CFPB's rules apply to non-depository institutions within their jurisdiction, Dodd-Frank specifically excluded auto dealers from the CFPB's rulemaking and enforcement authority. (77) Indirect auto lenders, however, may be subject to vicarious liability for other "creditor" action under the ECOA, and auto dealers are considered "creditors" under the ECOA definition. (78) The Bulletin therefore seeks not to regulate auto dealers directly, but rather to effectively enlist indirect auto lenders under its jurisdiction; in order to police auto dealer transactions that otherwise would be outside its jurisdiction. (79)

This approach is problematic because without primary enforcement authority over smaller banks and credit unions with assets totaling less than $ 10 billion, implementation of the Bulletin may occur unevenly across the auto-lending industry. (80) If lenders continue allowing dealer discretion and interest rate markups, larger creditors will run the risk of noncompliance in the eyes of an aggressive and zealous CFPB. (81) Other regulatory enforcers, however, such as the Office of the Comptroller of Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the FRB, or the National Credit Union Administration (NCUA), will have the primary enforcement authority to carry out those rules against smaller creditors outside of the CFPB's jurisdiction. (82) Dodd-Frank allows regulators with primary jurisdiction over CFPB-exempt institutions the exclusive authority to enforce consumer protection laws. (83) However, even if regulators want to enforce the Bulletin against indirect lenders, they may not be able to enforce the Bulletin consistent with the CFPB interpretation, since the CFPB has not provided the threshold or standard it uses to determine when enforcement action is appropriate. (84) Enforcement could therefore be inconsistent, especially since the Bulletin does not create a formal rule that would necessarily bind other enforcement agencies. (85)

The CFPB may notify other regulators of material violations of federal consumer financial law and recommend action to which other regulators must respond within sixty days. (86) It seems that unless regulators develop their own threshold standards for determining discrimination, other regulators must wait for either a notification from the CFPB or CFPB guidance on the measurement standard they will use to enforce the Bulletin against lenders within their primary enforcement jurisdiction.

Even though other enforcement agencies may not be bound to enforce the CFPB guidance against creditors outside CFPB jurisdiction, other agencies have shown support and coordination with the CFPB to enforce the Bulletin. (87) In December 2013, the CFPB and DOJ announced the agencies' first joint fair lending enforcement action in an attempt to enforce the Bulletin against Ally. (88) The enforcement action settled for $98 million, the largest auto finance action ever and the third largest fair lending action for the DOJ. (89)

Ally is clearly within CFPB jurisdiction as one of the largest indirect auto lenders in the United States. (90) Nevertheless, agencies that are not bound to enforce the Bulletin may still have incentive to pursue large settlements, like the one against Ally. The concern is that lenders outside CFPB jurisdiction, by definition smaller institutions, will not receive consistent enforcement from their prudential regulators because they are not required to enforce the Bulletin and do not have a standard by which to independently enforce it. (91)

B. Implementation Issues: Informal Guidance Versus Formal Rule

1. CFPB Rulemaking

The second problem with the Bulletin is it was issued in the form of guidance rather than as a formal rule. (92) The Bulletin introduces new interpretations of the ECOA and Regulation B that were not clearly or previously understood from the text of Regulation B. (93) Formal CFPB rulemaking, however, is subject to the requirements of Dodd-Frank and the APA, while informal CFPB guidance is not. (94)

2. Dodd-Frank Rulemaking Requirements

Dodd-Frank requires that before issuing a rule the CFPB must consider the potential costs and benefits to consumers and covered providers of consumer financial services, including any potential decrease of customer access to consumer financial products or services resulting from such a rule. (95) Moreover, the CFPB may not adopt any rule without first consulting with federal bank regulators and appropriate agencies "about the 'consistency' of the proposed rule with 'practical, market, or systematic objectives of such agencies.'" (96) Because rules are subject to mandatory oversight by other regulators, and careful consideration of costs and benefits to consumers under Dodd-Frank, it is a quicker, easier process for the CFPB to issue a BULLETIN rather than a formal rule. (97)

3. APA Rulemaking Requirements

Additionally, all federal rulemaking is subject to the notice and comment requirements of the APA. (98) The APA requires agencies to give notice and opportunity to "interested persons to participate in the rulemaking process through submission of written data, views, or arguments." (99) The APA does not apply to interpretive rules or general statements of policy. (100) Agencies will often, however, allow a comment period for publications involving significant policy actions. (101)

4. The CFPB Decision Not to Issue a Rule

This interpretation was not published for comment because the CFPB does not acknowledge a change in the state of the current law concerning auto lending in its BULLETIN. (102) The guidance, according to the CFPB, took the form of cautionary remarks simply informing indirect auto lenders that they "may be operating under the incorrect assumption that they are not liable under the ECOA for pricing disparities." (103)

Senators Portman (R-OH) and Shaheen (D-NH) requested an explanation of how the BULLETIN is consistent with federal law and the APA. (104) The CFPB responded in a letter stating that in considering whether to issue a formal rule, the CFPB decided that existing law, regulation, and official commentary already addressed the subject matter of the BULLETIN. (105) The letter explained that the CFPB merely reminded lenders of their responsibilities under the ECOA and offered guidance on how to address risks. (106) The CFPB concluded it was therefore not statutorily required to comply with the APA notice and comment requirements, though it mentioned that it "advised" the FRB and FTC about the BULLETIN before it was issued. (107)

5. Change in Understanding of the Law Warrants a Rule

While the CFPB emphasized that the BULLETIN did not "create or change any new regulatory requirements," lenders considered the BULLETIN a new interpretation of the law. (108) Regulation B states that "a person is not a creditor regarding any violation of [the ECOA] or [Regulation B] committed by another creditor unless the person knew or had reasonable notice of the act, policy, or practice that constituted the violation before becoming involved in the credit transaction." (109) Creditors previously understood this section of Regulation B to be a safe harbor, limiting a creditor's liability for another creditor's violation. (110) However, the BULLETIN completely changed the common understanding of the law by stating:
      This provision limits a creditor's liability for
   another creditor's ECOA violations under certain
   circumstances. But it does not limit a creditor's liability
   for its own violations--including, for example, disparities
   on a prohibited basis that result from the creditor's
   markup and compensation policies. (111)


The BULLETIN thereby reinterprets dealer markups, which were previously considered actions of auto dealers acting of their own volition, which would have insulated lenders from liability under Regulation B. (112) Rather than considering the auto dealers' actions as separate from those of the lenders, the BULLETIN views the compensation policy and allowance of dealer discretion as action by the lenders, for which they may be held liable if the dealer's discretion results in a violation of the ECOA. (113) While this interpretation now affects indirect auto lenders as it did not in the past, the CFPB nevertheless maintains that the BULLETIN does not change the law, but serves merely as a reminder with "nothing new" to add. (114)

6. The Value of the APA Process

The APA serves an important governmental check on the legislative powers of unelected officials who effectively create law through bureaucratic or administrative action, rather than legislation. (115) Circumventing the APA requirements deprives regulated entities of procedures that legitimize administrative policies and protect against encroachments. (116) When an agency issues guidance as opposed to a rule, a concerned public is barred from asking questions and discussing the implications of the decision with the agency. (117) Another drawback to interpretive rules is that there is no implementation period for creditors to bring their performance into compliance, even as they still question the full meaning and methods of compliance. (118) Lenders are expected to preemptively comply with the onerous and perhaps aggressive suggestions for compliance outlined in the Bulletin, despite any lingering questions, lest risk noncompliance liability. (119)

7. The Problem with Bypassing the Dodd-Frank Rulemaking Requirements

Dodd-Frank requires the CFPB to consider the costs and benefits of its rule, presumably because there is value in considering the impacts. (120) A bipartisan congressional letter asked whether the CFPB conducted a cost-benefit analysis of how an industry move to compensate dealers for arranging financing through flat fees would affect the auto-lending market and consumers, since the CFPB recommends flat fees in the BULLETIN. (121) The CFPB repeated that it was not obligated to do so because its BULLETIN was not subject to Dodd-Frank's rulemaking requirements, but admitted that it had neither conducted any studies of how market-wide adoption of a flat-fee compensation program would affect credit availability, nor had it analyzed the impact of all of the recommendations it made to lenders to eliminate discrimination from their indirect auto-lending programs. (122) More alarmingly, the CFPB response did not state whether it had weighed the costs and benefits of any of its recommended lender actions. (123) The CFPB stated that in general, it believes "that fair lending and the legitimate needs of creditors are compatible." (124)

8. Binding Power of an Interpretive Rule

Bypassing the process of notice and comment rulemaking exposes the BULLETIN to other problems. The BULLETIN takes the form of an "interpretive rule" defined as "rules or statements issued by an agency to advise the public of the agency's construction of the statutes and rules which it administers." (125) The APA exempts interpretive rules from its notice and comment requirements. (126) However, when a rule is promulgated as an interpretive rule, its binding power is unclear. (127)

Interpretive rules are not legally binding, but the extent to which they are practically binding is a "function of the likelihood that they will be challenged in court, and then of the likelihood that the court will uphold them." (128) In the wake of United States v. Mead, (129) a court is likely to apply "Skidmore deference" (130) to a non-legislative agency rule. (131) In Mead, the Court applied Skidmore deference saying, "[interpretations such as those in opinion letters--like interpretations contained in policy statements, agency manuals, and enforcement guidelines, all of which lack the force of law--do not warrant Chevron-style deference." (132) Applying this standard, the court determined the weight of an administrator's judgment in a particular case is based on "the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control." (133)

Therefore, the CFPB BULLETIN is not legally binding, but it is binding in effect to the extent that weak judicial deference allows. (134) But since a substantive review of the BULLETIN under Skidmore deference is unlikely to occur outside of a defense to a CFPB enforcement action in a U.S. district court, it remains a game of roulette to risk noncompliance with the Bulletin's warnings and encouragements. (135)

This uncertainty on the Bulletin's binding authority puts lenders between a rock and a hard place: weighing the risks of noncompliance with the benefits of continuing to allow dealer reserve compensations. (136) The comparatively risk averse nature of some lenders may make the Bulletin binding, while others may not find the need to adhere to a non-legally binding rule, leading to uneven implementation of the Bulletin.

Finally, while the binding effect of the Bulletin on regulated parties is uncertain, the form of the issuance as guidance also affects its binding effect on other regulatory agencies, which compounds the problem of the CFPB's limited jurisdiction. (137) Because the CFPB has chosen to publish the Bulletin as guidance rather than a rule, the guidance amounts to a recommendation on how the ECOA should be applied. (138) Other enforcement agencies may choose not to enforce the ECOA consistently with the CFPB's interpretation, even if the other agencies are given a threshold by which to measure discriminations. (139) The CFPB's interpretive rule will likely dictate its own enforcement posture, but other agencies enforcing the ECOA for lenders with less than $10 billion are not bound to adopt the same stance. (140)

C. Proxy and Data Collection Issues

1. Reliability of Proxies as Stand-In Values for Real Data

Even though the form of the Bulletin creates uncertainty around the "reach and legal quality of the standards the agency has imposed," (141) it is not clear whether the CFPB is able to reliably measure or provide a measurable standard for the discrimination it seeks to root out from indirect lending practices. (142)

The Bulletin states that, "there is a significant risk [of] ... pricing disparities on the basis of race, national origin, and potentially other prohibited bases." (143) However, the CFPB's research into discrimination relied solely on mathematical proxies for race and ethnicity that are susceptible to significant margins of error. (144) The proxies used Social Security Administration (SSA) and Census Bureau information as well as applicants' surnames and geographic location to create stand-in values that estimate the chance that someone is a racial or ethnic minority. (145) The CFPB then used the proxy values for race and ethnicity to determine where consumers might be experiencing discrimination based on the interest rates these proxy-determined minorities received. (146)

Upon request from both House Democrats and Republicans for greater disclosure surrounding the data and thresholds that the CFPB used to determine the existence of disparities, the CFPB merely reiterated that it relied on proxies using publicly available surname and geographic data from the SSA and the Census Bureau to produce its results. (147) The CFPB reaffirmed its use of this "integrated method" in a second letter to Congress on November 4, 2013. (148) The accuracy of discrimination data based on such methods, as a replacement for statistical data, is questionable. (149) The CFPB maintains, however, that such proxy methodology has been used for decades in support of civil rights claims, including voting rights cases, Title VII cases, and equal protection matters. (150) The CFPB also stated "research has found that the integrated approach produces proxies that correlate highly with self-reported race and national origin data and is more accurate than using surname or geography alone." (151)

2. Comparison of Auto Lender Data and Mortgage Lending Data

The Bulletin released by the CFPB was not supported by any corresponding data collection legislation, since auto dealers are excluded from the CFPB's purview. (152) Congress did not enact legislation requiring auto dealers to collect data on their lending transactions to help the CFPB regulate outside its jurisdiction. (153) The CFPB is, therefore, unable to rely on hard data about consumers, which is why it relies solely on proxies. (154)

By contrast, the CFPB has been successful in carrying out its mandates in the mortgage market under Dodd-Frank largely because of the Home Mortgage Disclosure Act (HMDA), which requires data collection for transactions subject to the FIMDA. (155) Because the mortgage market is expressly subject to the CFPB's regulations, Congress enacted supporting data collection legislation. (156) Dodd-Frank even empowers the CFPB to expand on the requirements of the FIMDA, further facilitating the CFPB's collection of information about the consumer's race and ethnicity in mortgage transactions. (157) Unlike the CFPB's regulation of auto lending, the HDMA enables the CFPB to collect accurate data in mortgage lending. (158)

3. Data and Compliance Expectations

The lack of hard data make it difficult for the CFPB to provide quantifiable justification for its Bulletin, but it also raises significant issues with its expectation that indirect auto lenders will be capable of measuring their compliance or identifying potential discriminatory impacts. (159)

The CFPB's difficulty in establishing a widely credible methodology for identifying discrimination without compelling disclosure from consumers is no surprise. There are many permissible factors that potentially influence a negotiated interest rate, including a consumer's negotiating style, commitment to the transaction, the type of vehicle selected, or the time frame of the transaction. (160) Without properly taking these factors into account, it is difficult to demonstrate with any certainty that discrimination was the cause for a higher interest rate. (161) Also, even if the integrated method is a sufficiently reliable way to measure discrimination, it is unlikely that many dealers will make enough auto loans to produce statistically significant results for lenders to identify discrimination within individual dealer portfolios. (162) If the CFPB expects indirect auto lenders to discontinue business with a dealer or issue swift remuneration to affected customers, reliance on insufficient data to comply with enigmatic standards is problematic. (163)

Finally, the CFPB analysis ignores a crucial reality of dealer reserve compensation. (164) Dealer markups are part of a two-pronged negotiation over purchase price and interest rate, and compensation from markups can be used to offset lower purchase prices. (165) So analyzing interest rates alone does not assess the total impact of the transaction, whether positive or negative, to the consumer. (166) The CFPB analysis of interest rates, therefore, fails to conclusively establish any negative impact to minority consumers, even if it had relied on accurate data.167 168

IV. Enforcement

A. The CFPB's Reliance on the Controversial Theory of Disparate Impact

The Bulletin seems to take its theory of liability directly from an amicus curiae brief filed by the DOJ in support of the plaintiffs in Cason v. Nissan Motor Acceptance Corp. (168) In the brief, the DOJ argued that Nissan was liable for discriminatory practices of a particular Nissan dealership because it "designed and implemented the very system that quite predictably resulted in the alleged discriminatory conduct by dealers." (169) The DOJ also argued that Nissan had the ability to establish policies preventing dealer pricing on an illegal basis and could have monitored for racial disparities. (170) The case ultimately settled, and Nissan agreed to a cap on discretionary dealer pricing to address the issue. (171)

The Bulletin elaborates on the DOJ's legal arguments, announcing that lenders may be liable for disparities within the lender's portfolio under the legal doctrines of both disparate treatment and disparate impact. (172) There are issues in applying each of these theories to indirect lender liability.

B. Disparate Treatment Doctrine

Liability for discrimination under the disparate treatment doctrine occurs when a creditor treats an applicant differently based on a prohibited factor such as race or national origin. (173) The disparate treatment doctrine is not likely applicable to most lenders that allow dealer participation markups because liability under the disparate treatment theory requires the plaintiff prove that the lender had the intent or motive to discriminate. (174) Since dealer participation is a compensation method widely used in the auto-lending industry and lenders essentially just set rates, it is not likely that intent or motive to discriminate could be imputed onto a third-party lender for discrimination occurring within a dealer-consumer transaction. (175) Additionally, the burden of proof to establish liability under the theory of disparate treatment likely is insurmountable in cases imputing liability to third parties. (176)

C. Disparate Impact Doctrine

Instead of relying on the disparate treatment doctrine, the CFPB will most likely rely on the disparate impact doctrine, also known as the "effects test." (177) The CFPB vowed to root out unlawful practices that are "fair in form but discriminatory in operation." (178) Under the disparate impact doctrine, a lender may be liable for facially neutral practices or policies that result in discriminatory impacts, even if the lender lacked intent to discriminate. (179)

Private litigants and the DOJ began advancing the disparate impact theory in the 1990s, but the theory is controversial. (180) In 2011, the Supreme Court granted certiorari in Magner v. Gallagher, a case challenging the disparate impact theory under the Fair Housing Act of 2011. (181) However, the DOJ pressured the appellant to withdraw the petition for certiorari in a publicized quid pro quo exchange, which required the appellant city to withdraw its housing discrimination case before the Supreme Court in exchange for the DOJ's disinclination to intervene in an unrelated False Claims Act case against the city. (182) Some in the legal community have interpreted the DOJ's pressure on the appellant to withdraw its appeal in Magner as indicating weakness in the legal basis of the disparate impact theory. (183) More recently, the DOJ-CFPB settlement against Ally likely prevented another chance to argue a case based on the disparate impact theory before the Court. (184)

The disparate impact theory of liability is also "recognized in employment cases involving the Americans with Disabilities Act, the Age Discrimination in Employment Act, and Title VII of the Civil Rights Act," but each of these statutes makes it unlawful to "affect" the opportunities of minorities or protected classes. (185) However, neither the Fair Housing Act nor the ECOA includes "affect" in that context. (186) The disparate impact doctrine considers only a discriminatory result. (187) If the statute, in this case the ECOA, does not prohibit the affecting of opportunities for minorities, it is questionable whether such a results-based doctrine can impose liability under the ECOA. (188)

In June 2013, the Supreme Court granted certiorari in another case testing the disparate impact theory, Mt. Holly Garden Citizens in Action v. Mt. Holly. (189) Once again, however, before the case was heard, the parties settled out of court. (190) Mt. Holly Garden Citizens was a Fair Housing Act case in which the Court could have decided whether African-American and Hispanic residents were disproportionately affected by a facially neutral redevelopment plan. (191) The Mt. Holly Garden Citizens case represents the most recent opportunity for the Court to confront the question of whether disparate impact theory will survive judicial scrutiny. (192) As a result, the credibility of the disparate impact theory and the liability of indirect lenders under that theory remain uncertain. (193)

D. Affirmative Defense to Disparate Impact Enforcement Efforts

Even if the disparate impact theory is legitimate, there is an affirmative defense to charges brought under the theory--a showing of a legitimate business need. (194) Any potential disparate impact should be weighed against the lender's legitimate business need for its dealer compensation policy. (195) If lenders can raise a legitimate business need as a defense to claims arising under the disparate impact theory, the burden shifts to the CFPB to establish that there is another way to achieve the legitimate business need without the disparate impact that the lender refused to adopt. (196)

V. Impact on the Market

Before the Bulletin's issuance, many viewed the dealer participation lending practice as a win-win for dealers and consumers. (197) In the dealer-assisted financing model, the consumer benefits from numerous lenders competing for the same business. (198) Even after dealer markups, dealer-assisted loans usually cost the consumer about one percent less than direct loans through the lender. (199) In addition to decreased costs through lender competition, the dealer-assisted model allows dealers to negotiate on two separate levels: purchase price and loan rate. (200) If dealers can mark up interest rates that have been driven down by lender competition, they have more flexibility to offer a lower purchase price to the consumer in order to close the sale. (201) Regardless of the Bulletin, if dealer discretion in markups is eliminated, dealers will continue to exercise discretion in negotiating purchase prices because the CFPB does not have the authority to directly regulate auto dealers. (202) If dealers lose negotiation power over interest rates, they are less likely to offer lower purchase prices because they will not have any way to offset that loss over the course of the transaction. (203)

Additionally, the Bulletin introduces confusion and impediments to competition that may lead to higher loan prices for all consumers. (204) Since lenders under the CFPB's jurisdiction are subject to a legally uncertain standard, the safest way for lenders to proceed is to follow the CFPB's guidance. (205) The Bulletin suggests that lenders impose controls on dealer discretion, or more simply, eliminate dealer discretion altogether. (206) As lenders comply with the Bulletin to varying degrees at varying speeds, auto dealers may choose to work with lenders allowing the highest dealer compensation rates or those that allow dealer discretion. (207)

Moreover, the Bulletin recommendations incorporate increased expenses for lenders retaining dealer discretion that will likely pass to consumers. (208) Lenders are required to police any dealer discretion they allow under the threat of CFPB enforcement action. (209) Recommended compliance measures include monitoring and statistical analyses of both lender and dealer-specific portfolios. These measures will be especially expensive for larger lenders that maintain relationships with thousands of auto dealers. (210) Finally, it can be expected that the costs associated with the defense of any CFPB action against lenders will also be passed on to consumers. (211)

A possible impact of the distortion in competition resulting from inconsistent enforcement, compliance, and adoption of the various CFPB-approved alternatives is that the cost of auto financing through dealers will increase, harming the consumer in the long run. (212) Still, the CFPB deemed conducting a cost-benefit analysis that would weigh the effects of the Bulletin's recommendations, "not appropriate" because it was not required. (213)

This grim outlook concerns only costs associated with compliance and assumes all lenders are subject to the same degree of enforcement. (214) This may not be the case under current CFPB jurisdiction. (215) The Bulletin's guidance contradicts remarks from Director Cordray that the CFPB intends to create a level playing field for market participants. (216) Small bank lenders not subject to the CFPB's guidance may continue to exercise discretion and maximize value from each lending transaction. (217) Encumbered with the Bulletin, non-excluded lenders may struggle to compete not only amongst themselves, but also with these smaller excluded lenders.

VI. Conclusion

The CFPB is acting zealously in pursuit of a worthy goal: the prevention of discrimination. (218) It is not clear, however, that there is compelling evidence of discrimination in the auto loan industry. (219) In their regulatory fervor, the CFPB may negatively impact the auto loan market, which, as discussed above, was expressly excluded from the CFPB's purview. (220)

The Bulletin lacks a solid legal foundation, transparency, adequate data, and legislative support. (221) Though its transparency has been somewhat bolstered in subsequent remarks and letters from the CFPB, (222) this increased transparency reveals that the CFPB refuses to acknowledge any change in the understanding of the ECOA implemented by its Bulletin. (223) For that reason, the CFPB will not conduct a cost-benefit analysis of its guidance. (224) As a result, those impacted by the guidance, including consumers, will have to wait and see what the effects will be.

Nevertheless, as undesirable as the CFPB's methods of implementing new requirements are, they are effective. (225) The CFPB may greatly reduce the prevalence of dealer markup compensation in the United States by holding the largest auto lenders to standards they cannot possibly work around. (226) Nine months after the Bulletin was issued, Ally paid the third largest settlement in DOJ history. (227) Although Ally may not have had much warning, other indirect auto lenders certainly do after news of the settlement. (228) Aside from wanting to avoid enormous settlements, it seems unlikely that major lenders will want to publicly defend against discrimination charges brought by the CFPB. (229) The Center for Responsible Lending cites lack of awareness and disclosure requirements about dealer markups as a problem. (230) While the CFPB did not issue a formal rule to address public awareness about dealer markups, the historically high settlement was publicized, along with explanations about the compensation practice that Ally was held liable for allowing. Therefore, the CFPB may be increasing public awareness about dealer compensation.

However, the CFPB charged forward to change the status quo in auto dealer compensation by ignoring the previous understanding of the ECOA, the limitations on its jurisdiction, the merits of cost-benefit analysis, and the other checks of the APA and Dodd-Frank. (231) The drawbacks and weaknesses to the CFPB's pace and disregard for rulemaking and its own limitations call the prudence of the Bulletin into question. (232) In attempting to rescue consumers by moving quickly to enact widespread change, the CFPB may be well on its way to impeding an efficient consumer auto loan market and sacrificing competitive loans for the very consumers it seeks to protect. (233)

(1.) Under Pressure: The CFPB and Auto Financing, Pepper Hamilton LLP 11 (Dec. 17, 2013), http://www.pepperlaw.com/webinars_update.aspx?ArticleKey=2797 [hereinafter Pepper Hamilton],

(2.) See generally Consumer Fin. Prot. bureau, CFPB Bull. No. 2013-02, Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act (2013), available at http://files.consumerfmance.gov/f7201303_cfpb_march_-Auto-FinanceBulletin.pdf [hereinafter Bulletin].

(3.) Equal Credit Opportunity Act (ECOA), 12 U.S.C. [section][section] 1691-1691f (2012).

(4.) Bulletin, supra note 2, at 2.

(5.) Mary Beth Hogan et al., The CFPB Issues Bulletin on Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act, Debevoise & Plimpton LLP 2 (Mar. 27, 2013), http://www.debevoise.com/files/Publication/909cb718-7 6dc-4261-a5bc 3cf9dd5f5828/Presentation/PublicationAttachment/2feb52cf-d8dd-4e5f- a5e548d045b96280/The%20CFPB%20Issues%20Bulletin%20on%20Indirect%20Auto%20Lend ing%20and%20Compliance%20with%20the%20Equal%20Cr.pdf.2; CFPB, DOJ Announce First Joint Fair Lending Action Against Indirect Auto Finance Company, Buckley Sandler LLP (Dec. 21, 2013), http://www.lexology.com/library/detail.aspx?g=ca8581179cef-4794-a362-dcal20858f79 [hereinafter Joint Enforcement Announcement],

(6.) Thomas O. Kelly III & Brent Ylvisaker, CFPB & Indirect Lending--The Saga Continues, Dorsey (Nov. 19, 2013), http://www.dorsey.com/eu_fsr_cQ3b_indirect_auto_lending/; Cody Lyon, CFPB, DOJ Eye Captives in Disparate Impact Probe (Sept. 23, 2013, 3:30 PM), http://autofinancenews.net/profiles/blogs/cpfb-doj-eye-captives-in-disparate-impact-probe.

(7.) See generally Letter from the H. Comm, on Fin. Services to Richard Cordray, Dir., Consumer Fin. Prot. Bureau (May 28, 2013), available at http://www.infobytesblog.com/wp-content/uploads/2013/05/House-Democrats-autolending-letter-5-28-13.pdf [hereinafter Committee Letter]; Letter from Cong, to Patrice Ficklin, Assistant Dir., Consumer Fin. Prot. Bureau (June 20, 2013), available at http://www.infobytesblog.com/wp-content/uploads/2013/06/6-20-13-Republicans-Letter-to-CFPB-re-Auto-Lending.pdf [hereinafter Congress Letter]; Letter from Senators to Richard Cordray, Dir., Consumer Fin. Prot. Bureau (Oct. 30, 2013), available at http://online.wsj.com/public/resources/documents/SenatorsLettertoCordray.pdf [hereinafter Senate Letter]; Letter from Blaine Leutkemeyer, Congressman, H.R., to Richard Cordray, Dir., Consumer Fin. Prot. Bureau (Nov. 15, 2013), available at http://www.cfpbmonitor.com/files/2013/ll/Letter_Cordray-auto-lending-ll-15-20131.pdf [hereinafter Leutkemeyer Letter]; Letter from Jeff Merkley, Sen., to Richard Cordray, Dir., Consumer Fin. Prot. Bureau (Nov. 19, 2013), available at http://www.nada.org/NR/rdonlyres/588C08F0-4941-4503-8C40213251DFC2DD/0/20131119_Sen_Merkley_Letter_to_CFPB.pdf [hereinafter Merkley Letter]; Nat'l Automobile Dealers Assoc., NADA and NAMAD Question CFPB's Approach in its Guidance on Auto Lending, PR Newswire (Mar. 21, 2013, 7:01 PM), http ://news.yahoo.com/nada-namad-cfpbs-approach-guidance-auto-lending-230100971.html [hereinafter NADA Statement].

(8.) See infra Part D.

(9.) See infra Part III.

(10.) See infra Part IV.

(11.) See infra Part V.

(12.) See infra Part VI.

(13.) See generally Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), 12 U.S.C. [section][section] 5301-5641 (2012).

(14.) Oversight of Dodd-Frank Act Implementation, COMM. Fin. Services, http://fmancialservices.house.gov/dodd-ffank/ (last visited Jan. 14, 2014).

(15.) 12 U.S.C [section] 5511.

(16.) 15 U.S.C. [section] 16910-2 (2012); Equal Credit Opportunity Act (ECOA), Consumer Fin. Prot. Bureau 1 (June 2013), http://files.consumerfmance.gov/f7201306_cfpb_lawsand-regulations_ecoa-combined-june-2013.pdf.

(17.) 15 U.S.C. [section] 1691(a)(1).

(18.) 12 C.F.R. [section] 1002.1 (2013).

(19.) Id.; 15 U.S.C. [section] 1691(a) (stating that Regulation B and the ECOA also prohibit creditors from discriminating based on an applicant's reliance on income from public assistance programs or on an applicant's good faith exercise of any right under the Consumer Credit Protection Act).

(20.) 12 U.S.C. [section] 5519(a).

(21.) Press Release, Nat'l Auto Dealers Ass'n, Auto Dealers Excluded from Wall Street Bill (June 25, 2010), available at http://www.nada.org/MediaCenter/News+Releases/2010/Auto+Dealers+Excluded+ffom+W all+Street+Bill.htm.

(22.) 156 CONG. Rec. S5912 (daily ed. July 15, 2010) (recording the statements of Sen. Sam Brownback).

(23.) Brady Dennis, Oversight Exemption for Auto Dealers Gaining Traction, WASH. Post (June 23, 2010), http://www.washingtonpost.com/wpdyn/content/article/2010/06/22/AR2010062205323.html?sid=ST2010062205332 (discussing the views of Rep. Frank, chairman of the House-Senate Conference Committee and Sen. Dodd, former chairman of the Senate Banking Committee, on the auto dealer exclusion amendment to Dodd-Frank); see also David Dayen, CFPA Passes House Committee; Amendment Exempting Auto Dealer Financing Passes, Too, Firedoglake (Oct. 22, 2009, 9:38 AM), http://news.firedoglake.com/2009/10/22/cfpa-passes-house-committeeamendment-exempting-auto-dealer-financing-passes- too/; David Schepp, Auto Dealers Carve Out Exemption in Consumer-Protection Legislation, Daily Fin. (Dec. 4, 2009, 5:11 PM), http://www.dailyfinance.com/2009/10/24/auto-dealers-carve-out-exemption-inconsumer-protection-legislat/.

(24.) Danielle Douglas, Justice Department Teams with CFPB in Probe of Possible Discriminatory Auto Financing, WASH. POST (Nov. 15, 2013), http://www.washingtonpost.com/business/economy/justice-department-teams-with-cfpb-inprobe-of-possible-discriminatory- auto-fmancing/2013/11/14/8fc8e8ae-4d51-11e3-9890-ale0997fb0c0_story.html.

(25.) See generally Bulletin, supra note 2, at 1.

(26.) Id.

(27.) Id.

(28.) Id.

(29.) Id.

(30.) Id.

(31.) Bulletin, supra note 2, at 1. Another method of allowing dealers to mark up interest rates is through the use of rate sheets. Lenders can provide auto dealers with a list of predetermined buy rates based on the applicant's credit information, which permits the dealer to mark up those rates when an applicant's credit establishes the applicant's minimum buy rate according to the rate sheet. Id. at 3.

(32.) CTR. FOR RESPONSIBLE LENDING, COMMENTS TO THE FEDERAL TRADE COMMISSION MOTOR VEHICLE ROUNDTABLES 6 (Mar. 30, 2012), available at http://www.responsiblelending.org/other-consumer-loans/auto-fmancing/researchanalysis/FTC-Comment-February-2-2012.pdf.

(33.) Dealer reserve or dealer participation is the practice at issue in the Bulletin. It is the practice of dealers marking up the interest rate from the buy rate the lender issues. If the consumer agrees to the higher interest rate, then the dealer will keep some percentage as compensation for their assistance in obtaining the loan. Bulletin, supra note 2, at 1.

(34.) Id.

(35.) See generally Ctr. for Responsible Lending, supra note 32.

(36.) Id. at 5.

(37.) DELVIN DAVIS, NON-NEGOTIABLE: NEGOTIATION DOESN'T HELP AFRICAN AMERICANS AND LATINOS ON DEALER-FINANCED CAR LOANS 2 (Jan. 2014), available at http://www.responsiblelending.org/other-consumer-loans/auto-fmancing/researchanalysis/CRL-Auto-Non-Neg-Report.pdf.

(38.) Press Release, Consumer Fin. Prot. Bureau, Director Cordray Remarks at the CFPB Auto Finance Forum (Nov. 14 2013), available at http://www.consumerfmance.gov/newsroom/director-cordray-remarks-at-the-cfpb-auto-finance-forum/[hereinafter Cordray Remarks].

(39.) See generally Bulletin, supra note 2. The Center for Responsible Lending reports that African-Americans and Latinos receive higher interest rates when they negotiate their auto loans through dealers than when they negotiate directly with lenders. Davis, supra note 37, at 2.

(40.) Bulletin, supra note 2, at 3.

(41.) Hogan et al., supra note 5, at 4.

(42.) 12 C.F.R. [section] 1002.2(1) (2013); Bulletin, supra note 2, at 3; Michelle A. Samaad, Auto Trade Groups Question CFPB's Indirect Lending Guidance, Credit Union Times (Mar. 22, 2013), http://www.cutimes.eom/2013/03/22/auto-trade-groups-question-cfpbsindirect-lending (saying trade groups question CFPB targeting of dealer practices).

(43.) Bulletin, supra note 2, at 3.

(44.) See 15 U.S.C. [section] 1691(a) (2012) (forbidding discrimination under the ECOA based on race, color, religion, national origin, sex, marital status, age, reliance on income from a public assistance program, or good faith exercise of any rights under the Consumer Credit Protection Act); see also id. at 2.

(45.) 12 C.F.R. [section] 1002.2(1) (2013).

(46.) Id.

(47.) Bulletin, supra note 2, at 2. This sets up a quandary. Auto dealers are technically creditors under ECOA, which the CFPB is tasked with enforcing. Id. However, Dodd-Frank specifically excludes auto dealers from CFPB jurisdiction. 12 U.S.C. [section] 5519(a) (2012). The CFPB circumvents the exclusion by charging indirect auto lenders with vicariously liability for other "creditors" and requiring creditors under its jurisdiction to police the auto dealers that it may not directly regulate itself. See id.; see also Bulletin, supra note 2, at 2.

(48.) 12 C.F.R. [section] 1002(1) (2013); see also Bulletin, supra note 2, at 2.

(49.) Bulletin, supra note 2, at 2; Samaad, supra note 42.

(50.) Bulletin, supra note 2, at 2-3.

(51.) Bulletin, supra note 2, at 4; PEPPER HAMILTON, supra note 1.

(52.) See Bulletin, supra note 2, at 4.

(53.) Id. at 5.

(54.) Id.

(55.) See generally Letter from Richard Cordray, Dir., Consumer Fin. Prot. Bureau, to Rob Portman and Jeanne Shaheen, U.S. Senators (Nov. 4, 2013), available at http://www.nada.org/NR/rdonlyres/2982D839-5C4E-4B46-AE7B7591DA7704D0/0/20131104_CFPB_Response_to_PortmanShaheen.pdf [hereinafter Letter to Senators]; see also Cordray Remarks, supra note 38.

(56.) Letter to Senators, supra note 55, at 5.

(57.) Cordray Remarks, supra note 38.

(58.) Bulletin, supra note 2, at 5.

(59.) Cordray Remarks, supra note 38.

(60.) See generally Letter from Richard Cordray, Dir., Consumer Fin. Prof. Bureau, to Rep. Terri Sewell (June 20, 2013), available at http://www.icemiller.eom/enewsletter/Current-C/080213%201etter%20to%20Congress%20%20Indirect%20Auto%20Financing.PDF [hereinafter Letter to Congress] (replying to requests for clarification from Congress).

(61.) See generally NADA Statement, supra note 7.

(62.) See generally Committee Letter, supra note 7; see also Congress Letter, supra note 7; Senate Letter, supra note 7; Leutkemeyer Letter, supra note 7; Merkley Letter, supra note 7.

(63.) David N. Anthony et al., Republicans Demand Answers from CFPB on Indirect Auto Lending Guidelines, TROUTMAN SANDERS (June 25, 2013), http://www.troutmansanders.com/republicans-demand-answers-ffom-cfpb-on-indirect-autolending-guidelines-06-25-2013/.

(64.) See Letter to Congress, supra note 60, at 2-3.

(65.) See Ctr. for Responsible Lending, supra note 32, at 4.

(66.) See id. (showing the CRL surveyed North Carolina voters and found that 79% were unaware of the dealer markup practice).

(67.) See generally Federal Trade Commission Act, 15 U.S.C. [section][section] 41-58 (2012); see also id.

(68.) See 12 C.F.R. [section] 226.36(d) (2013) (restricting the methods of compensation for mortgage loan originators); see also 12 U.S.C. [section] 632 (2012) (defining the jurisdiction of the FRB).

(69.) See Press Release, Bd. of Governors of the Fed. Reserve Sys. (Aug. 16, 2010), http:/Avww.federalreserve.gov/newsevents/press/bcreg/20100816d.htm.

(70.) See 12 C.F.R. [section] 226.36(d) (2013) (prohibiting compensation for mortgage loan originators from anyone other than the consumer in connection with the transaction); see also 12 U.S.C. [section] 632 (2012) (defining the jurisdiction of the FRB).

(71.) Ctr. for Responsible Lending, supra note 32, at 4.

(72.) Id.

(73.) See Jacob Gerber, Comment, Silence Isn't Golden: The CFPB's Privilege Rule and the Risk of Failure under Chevron Step One, 17 N.C. BANKING INST. 275, 287 (2013); see also Justin Whitesides, The CFPB Is Keeping an Aggressive Pace, Credit Union Mag. (Feb. 2013), http://mydigimag.rrd.eom/artide/The_CFPB_Is_Keeping_An_Aggressive_Pace/1288389/143022/article.html.

(74.) See discussion infra Part III.

(75.) See 12 U.S.C. [section][section] 5514-5515 (2012).

(76.) 12 U.S.C. [section] 5516(d).

(77.) Id. [section] 5519(a).

(78.) 12 C.F.R. [section] 1002.2(1) (2013); Bulletin, supra note 2, at 2-3.

(79.) See Bulletin, supra note 2, at 3.

(80.) See 12 U.S.C [section] 5516(d).

(81.) See Leonard Chanin et al., CFPB Fair Lending Guidance for Indirect Auto Lenders--It's Not Just about Cars, MORRISON FOERSTER 1 (June 4, 2013), http://www.mofo.com/files/Uploads/Images/130604-CFPB-Auto-Lenders.pdf.

(82.) See 12 U.S.C. [section] 5516(d).

(83.) See id.

(84.) See id. [section] 5516(d)(2) (describing the referral process when the CFPB believes that a party outside its jurisdiction has violated federal consumer financial law as a process instigated by the CFPB and demonstrating that either through this process or outside of it other regulators cannot take initiative without a standard by which to measure discrimination across lender portfolios).

(85.) See Chanin et al., supra note 81, at 3.

(86.) See id.

(87.) See Pepper Hamilton, supra note 1 (discussing the CFPB Auto Finance Forum held in Washington, DC and mentioning that it was attended by several federal agencies, including the DOJ); see also Joint Enforcement Announcement, supra note 5.

(88.) See Joint Enforcement Announcement, supra note 5; Press Release, U.S. Dep't of Justice, Justice Department and Consumer Financial Protection Bureau Reach $98 Million Settlement to Resolve Allegations of Auto Lending Discrimination by Ally (Dec. 20, 2013), available at http://www.justice.gov/opa/pr/2013/December/13-crt-1349.html [hereinafter Settlement Press Release].

(89.) Joint Enforcement Announcement, supra note 5 (noting that Ally was required to pay $80 million in compensation to victims of discrimination and $18 million to the CFPB's Civil Penalty Fund in addition to improving monitoring and compliance systems).

(90.) See Consent Order by CFPB for Ally, 2013-CFPB-0010, available at http://files.consumerfmance.gOv/f/201312_cfpb_consent-order_ally.pdf; Press Release, Consumer Fin. Prot. Bureau, CFPB and DOJ Order Ally to Pay $80 Million to Consumers Harmed by Discriminatory Auto Loan Pricing (Dec. 20, 2013); see also 12 U.S.C. [section] 5515(c) (2012) (defining CFPB jurisdiction to cover insured depository institutions and credit unions with assets totaling more than $10 billion).

(91.) See 12 U.S.C. [section] 5516(d) (providing enforcement authority to primary regulators for depository institutions and credit unions with assets totaling less than $10 billion).

(92.) See Brett Foster et al., Locke Lord QuickStudy: Discretionary Pricing in Auto Lending and the CFPB (Oh No!) Locke Lord LLP (Apr. 2, 2013), http://www.lockelord.com/qs_2013discretionarypricing/.

(93.) See Chanin et al., supra note 81, at 4-5; Bulletin, supra note 2, at 3.

(94.) See Administrative Procedure Act, 5 U.S.C. [section] 553 (2012) (governing agency rulemaking); see also 12 U.S.C. [section] 5512(b) (describing the additional requirements for formal rulemaking imposed on the CFPB by Dodd-Frank).

(95.) 12 U.S.C. [section] 5512(b).

(96.) Arthur E. Wilmarth, Jr., The Financial Services Industry's Misguided Quest to Undermine The Consumer Financial Protection Bureau, 31 Rev. Banking & Fin. L 881, 910 (2012) (quoting 12 U.S.C. [section] 5512(b)).

(97.) See id.

(98.) See generally Administrative Procedure Act, 5 U.S.C. [section] 553 (2012).

(99.) Id. [section] 553(c).

(100.) Id. [section] 553(b).

(101.) See Federal Register, A Guide to the Rulemaking Process (accessed Jan. 28, 2014) https://www.federalregister.gov/uploads/2011/01/the_rulemaking_process.pdf.

(102.) See Cordray Remarks, supra note 38; see also Letter to Senators, supra note 55, at 4-5 (responding that the CFPB chose not to issue a rule because the BULLETIN was published to "remind" and "offer guidance" implying that nothing had changed).

(103.) BULLETIN, supra note 2, at 3.

(104.) See generally Senate Letter, supra note 7.

(105.) See Letter to Senators, supra note 55, at 4.

(106.) See id.

(107.) Id. (suggesting that advising the FRB and FTC would have met the requirement of Dodd-Frank that the CFPB consult other appropriate agencies when rulemaking, while not conceding that the BULLETIN was subject to rulemaking requirements of either Dodd-Frank or the APA); see also 12 U.S.C. [section] 5512 (2012).

(108.) Letter to Senators, supra note 55, at 4 (emphasis added).

(109.) Equal Credit Opportunity Act (Regulation B), 12 C.F.R. [section] 1002.2(1) (2013).

(110.) Hogan et al., supra note 5, at 4.

(111.) BULLETIN, supra note 2, at 3; see also Chanin et al., supra note 81, at 2-3.

(112.) See BULLETIN, supra note 2, at 3.

(113.) See id.

(114.) Cordray Remarks, supra note 38.

(115.) See 5 U.S.C. [section] 553 (2012); see generally Jill Nylander, The Administrative Procedure Act, 85 Michigan Bar J. 38 (Nov. 2006), available at http://www.michbar.org/joumal/pdf/pdf4articlel078.pdf (describing the role of the Administrative Procedure Act).

(116.) See Thomas J. Fraser, Interpretive Rules: Can the Amount of Deference Accorded Them Offer Insight Into the Procedural Inquiry?, 90 B. U. L. Rev. 1303, 1310 (2010) (quoting to Jessica Mantel, Procedural Safeguards for Agency Guidance: A Source of Legitimacy for the Administrative State, 61 Admin L. Rev. 343, 344-345 (2009)).

(117.) See Chanin et al., supra note 81, at 3 ("However, publishing guidance avoids transparency and discussion of the issue, doing the CFPB and the public a disservice.").

(118.) See id.

(119.) See Settlement Press Release, supra note 88 (announcing the first auto lending settlement a mere nine months after the BULLETIN was issued and citing Ally's first efforts beginning in early 2013 as failures).

(120.) See 12 U.S.C. [section] 5512(b) (2012) (setting additional rulemaking requirements).

(121.) See Senate Letter, supra note 7.

(122.) Id. (emphasis added).

(123.) Id. (emphasis added).

(124.) Id.

(125.) See Fraser, supra note 116, at 1307 (quoting U.S. Dep't of JUSTICE ATTORNEY GENERAL'S MANUAL ON THE ADMINISTRATIVE PROCEDURE ACT 30 n.3 (1947)).

(126.) 5 U.S.C. [section] 553(b)(3)(A) (2012).

(127.) Fraser, supra note 116, at 1319-20 (citing Robert A. Anthony, Three Settings in Which Nonlegislative Rules Should Not Bind, 53 Admin. L. Rev. 1313, 1314 (2001)).

(128.) Id.

(129.) 533 U.S. 218 (2001).

(130.) Skidmore deference is "weak deference" or "nothing more than respect or courteous regard." Jim Rossi, Respecting Deference: Conceptualizing Skidmore within the Architecture of Chevron, 42 Wm. & Mary L. Rev. 1105, 1109-10 (2001).

(131.) See United States v. Mead Corp., 533 U.S. 218, 240-41 (2001) (stating that only when agencies act through adjudication, notice and comment rulemaking or another procedure indicating congressional intent is Chevron deference applicable and once it is determined not to be applicable, Skidmore deference applies); see also Christensen v. Harris Cnty., 529 U.S. 576, 587 (2000) (providing an example of Skidmore deference).

(132.) When giving Chevron deference, courts should defer to agency interpretations of statutes unless those interpretations are unreasonable. See Chevron v. NRDC, 467 U S 837 (1984).

(133.) Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944).

(134.) Fraser, supra note 116, at 1326.

(135.) See id. at 1319.

(136.) See id.

(137.) See 12 U.S.C. [section][section] 5515(c), 5516(d) (2012).

(138.) See id. [section] 5516(d).

(139.) See generally id. [section] 5515(c).

(140.) See id. [section] 5516(d).

(141.) Fraser, supra note 116, at 1310.

(142.) See Carl G. Pry, Proxy Expectations, ABA BANK COMPLIANCE (Jan.-Feb. 2014), http://www.treliant.com/NewsandEvents/Articles/ArticleDetails/tabid/147/ArticleID/26617/ Carl-G-Pry-Proxy-Expectations (explaining the shortcomings of proxy values as substitution for real data).

(143.) BULLETIN, supra note 2, at 2.

(144.) See Foster et al., supra note 92.

(145.) Letter to Congress, supra note 60, at 2-3.

(146.) See id.

(147.) See id.

(148.) Letter to Senators, supra note 55, at 2-4.

(149.) Pry, supra note 142 (asking for example, what are the chances that a proxy based on last name Perez in rural Dobson, North Carolina will correctly identify a Caucasian applicant).

(150.) See Letter to Senators, supra note 55, at 2.

(151.) Id. at 3.

(152.) See generally 12 U.S.C. [section] 5519(a) (2012) (excluding auto dealers from CFPB jurisdiction and providing no data collection provisions).

(153.) See generally id.

(154.) See generally id.

(155.) See generally Home Mortgage Disclosure Act of 1975, 12 U.S.C. [section][section] 2801-2811 (2012).

(156.) See generally id. [section][section] 2801-2811. Regulation C implements the HMDA. See 12 C.F.R. [section] 1003 (2013).

(157.) See Consumer Fin. Prot. Bureau, Home Disclosure Act (HMDA) and Regulation C-Compliance Management; CFPB HMDA Resubmission schedule and Guidelines; and HMDA Enforcement, CFPB Bull. No. 2013-11 (Oct. 9, 2013), available at http://files.consumerfinance.gOv/f/201310_cfpb_hmda_compliance-bulletin_fairlending.pdf.

(158.) See 12 U.S.C. [section] 2803(h) (2012).

(159.) See Pry, supra note 142.

(160.) Yan Cao, Driving Toward Equality: Responses to Auto-Loan Discrimination, NYU LAW MAGAZINE (2013), available at http://issuu.com/nyulaw/docs/complete_law_school_magazine_2013/83 (listing factors other than race that may impact the setting of an interest rate).

(161.) See id.

(162.) Christine A. Edwards & Julius L. Loeser, CFPB Issues Bulletin on Indirect Auto Lending and Fair Lending, Winston & Strawn 2 (Mar. 27, 2013), http://www.winston.com/siteFiles/Publications/cfpb_Issues.pdf (noting that it is not likely that individual auto dealers will make enough sales to produce a meaningful statistical regression analysis).

(163.) See BULLETIN, supra note 2, at 5 (suggesting, among other things, that lenders discontinue business with dealers when discrepancies are identified).

(164.) See Christopher J Willis, How the CFPB's Stance on ECOA in Auto Finance Will Raise Consumer Prices, CFPB MONITOR (Mar. 27, 2013),

http://www.cfpbmonitor.com/2013/03/27/how-the-cfpbs-stance-on-ecoa-in-auto-finance will-raise-consumer-prices/.

(165.) See id.

(166.) Id.

(167.) See id.

(168.) 28 Fed. App'x 392 (6th Cir. 2002); see also Chanin et al., supra note 81, at 3-4. Compare BULLETIN, supra note 2, at 3 (contending that indirect auto lenders are liable for discriminatory impact, if it set policies that allowed discriminatory impact to occur), with Br. for the United States as Amici Curiae Supporting Appellees, Cason v. Nissan Motor Acceptance Corp., 28 Fed. App'x at 392, available at http://www.justice.gov/crt/about/app/briefs/cason.pdf [hereinafter DOJ Brief] (arguing that Nissan should be liable for discrimination of a dealer because it was foreseeable that discrimination would occur based on the policies the lender set).

(169.) DOJ Brief, supra note 168, at 392.

(170.) Id.

(171.) Chanin et al., supra note 81, at 3-4.

(172.) BULLETIN, supra note 2, at 4.

(173.) 12 C.F.R. [section] 1002 Supp. I Sec. 1002.4(a)-1 (2013).

(174.) See Hogan et al., supra note 5, at 2.

(175.) See Tex. Dep't of Cnty. Affairs v. Burdine, 450 U.S. 248, 252-55 (1981) (landmark Supreme Court case establishing a burden of proof under disparate treatment doctrine that is very hard to meet).

(176.) See id. (establishing that the CFPB would likely have to show that the lender relied on a protected attribute of the consumer to set the interest rate and not any other lawful attribute, such as the consumer's negotiation capabilities or commitment to the transaction).

(177.) CONSUMER FIN. PROT. BUREAU, BULL. NO. 2012-04 (FAIR LENDING), LENDING DISCRIMINATION (Apr. 18,2012), available at http://files.consumerfmance.gOv/f/201404_cfpb_bulletin_lending_discrimination.pdf ("Consistent with other federal supervisory and law enforcement agencies, the CFPB reaffirms that the legal doctrine of disparate impact remains applicable as the Bureau exercises its supervision and enforcement authority to enforce compliance with the ECOA and Regulation B.").

(178.) Cordray Remarks, supra note 38 (quoting the United States Supreme Court). The phrase "fair in form but discriminatory in operation" has been repeated by the Supreme Court in its decisions finding impermissible disparate impact under Title VII of the Civil Rights Act of 1964. See 42 U.S.C. [section]2000e-2(a)(l) (2012); Espinoza v. Farah Mfg. Co., 414 U.S. 86, 92 (1973).

(179.) See generally Ricci v. DeStefano, 557 U.S. 557, 583 (2009) (demonstrating that courts have found employers liable for unintentional discrimination under facially neutral policies).

(180.) Chanin et al., supra note 81, at 1.

(181.) 132 S. Ct. 548 (2011) (showing that the Supreme Court granted cert).

(182.) See generally Gallagher v. Magner, 619 F.3d at 823 (8th Cir. 2010) (showing the arguments presented in the case challenging the disparate impact and disparate treatment doctrines under the Fair Housing Act); see also Sari Horwitz, Four Republican Lawmakers Accuse Justice Department of Inappropriate Quid Pro Quo, WASH. POST (Sept. 27, 2012), available at http://www.washingtonpost.com/world/national-security/for-republicanlawmakers-accuse-justice-department- of-inappropriate-quid-pro-quo/2012/09/27/61eaeb1608e8-11e2-al0c-fa5a255a9258_story.html.

(183.) Edwards & Loeser, supra note 162.

(184.) See Settlement Press Release, supra note 88, at 1-2; see also Joint Enforcement Announcement, supra note 5.

(185.) See 1 Joseph G. Cook & John L. Sobieski, Jr, DISPARATE IMPACT IN CIVIL RIGHTS ACTIONS [paragraph]21.23 (Matthew Bender & Co., 2013); 8 Donald Resseguie, CIVIL LIABILITY IN BANKING LAW [section] 161.04 (Matthew Bender Co., 2013); see also Edwards & Loeser, supra note 162.

(186.) Compare Americans with Disabilities Act of 1990, 42 U.S.C. [section] 12112(b)(1) (showing the express use of "affect" in defining discrimination), and Age Discrimination in Employment Act of 1967, 29 U.S.C. [section] 623(a)(2) (showing the express use of "affect" in defining discrimination), and Title VII of the Civil Rights Act of 1964, 42 U.S.C. [section] 2000e (showing the express use of "affect" in defining discrimination), with Fair Housing Act of 1968, 42 U.S.C. [section] 3604-06 (showing no use of "affect" in defining discrimination), and Equal Credit Opportunity Act, 15 U.S.C. [section] 1691 (showing no use of "affect" in defining discrimination).

(187.) Ricci v. DeStefano, 557 U.S. 557, 583 (2009) (demonstrating that courts have found employers liable for unintentional discrimination under facially neutral policies).

(188.) See Edwards & Loeser, supra note 162; see generally Smith v. City of Jackson, 544 U.S. 228 (2005) (discussing an employment discrimination case expounding on disparate impact theory and narrowly construing its application, so that it may also apply against the ECOA).

(189.) See generally Mt. Holly Gardens Citizens in Action, Inc. v. Twp. of Mt. Holly, 658 F.3d 375 (3d Cir. 2011).

(190.) See Twp. of Mt. Holly v. Mt. Holly Gardens Citizens in Action, Inc., 134 S. Ct. 636 (2013) (dismissing the case); see also Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., The Oyez Project at IIT Chicago-Kent College of Law, http://www.oyez.org/cases/2010-2019/2013/2013_11_1507 (last visited Jan. 24, 2014) (stating that the case was dismissed because the parties settled out of court).

(191.) See generally Mt. Holly Gardens Citizens in Action, 658 F.3d at 375 (giving the theory of the case before it was dismissed); see also Heather Anderson, Regulators Ramping Up Fair Lending Enforcement, Credit Union Times Sept. 9, 2013), available at http://www.cutimes.com/2013/09/09/regulators-ramping-up-fair-lendingenforcement?t=washington&page=3.

(192.) See generally Twp. of Mt. Holly, 134 S. Ct. at 636.

(193.) See Chanin et al., supra note 81, at 3.

(194.) See 12 C.F.R. pt. 1002 supp. I [section] 1002.6(a)(2) (2013); see also Wards Cove Packing Co. v. Antonio, 490 U.S. 642, 659 (1989) ("Though we have phrased the query differently in different cases, it is generally well established that at the justification stage of such a disparate-impact case, the dispositive issue is whether a challenged practice serves, in a significant way, the legitimate employment goals of the employer.").

(195.) See 12 C.F.R. pt. 1002 supp. I [section] 1002.6(a)(2) ("The Act and regulation may prohibit a creditor practice that is discriminatory in effect because it has a disproportionately negative impact on a prohibited basis, even though the creditor has no intent to discriminate and the practice appears neutral on its face, unless the creditor practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact.").

(196.) Ricci v. DeStefano, 557 U.S. 557, 624 (2009) (holding that the burden shifts to the complainant when a defendant shows a legitimate business need).

(197.) See Ira Silver, CFPB Targets Perceived Disparity in Dealer-Assisted Financing, WARDSAUTO (Aug. 16, 2013), http://wardsauto.com/industry-voices/cfpb-targets-perceiveddisparity-dealer-assisted- financing.

(198.) See id.

(199.) Willis, supra note 164.

(200.) See id.

(201.) See id.

(202.) See 12 U.S.C. [section] 5519(a) (excluding auto dealers from CFPB jurisdiction); see also id.

(203.) See Willis, supra note 164 ("If dealers are forced to accept less compensation for originating retail installment contracts, there is no reason to believe that they will simply absorb the loss; it is more likely that they will become less generous in discounting the prices of automobiles they sell.").

(204.) See Rachel Witkowski, Car Dealers Fight Back Against CFPB Auto Financing Rule, AM. BANKER (Mar. 22, 2013), available at http://www.americanbanker.com/issues/178_57/car-dealers-fight-back-against-cfpb-autofmancing-rule-1057779-1.html.

(205.) See Chanin et al., supra note 81, at 3.

(206.) BULLETIN, supra note 2, at 4.

(207.) See Foster et al., supra note 92, at 2 ("As lenders move at varying speeds, or not at all, toward eliminating discretionary pricing, auto dealers will--as a result of operational realities--congregate to lenders who leave their policy unchanged and competition for auto dealer paper will suffer. In theory, lenders who have eliminated auto dealer interest rate pricing discretion will have to raise their auto dealer compensation across the board if they wish to remain competitive. If things unfold in this way, the unintended consequence of the CFPB's policy on indirect auto lending will be to effect an overall increase in the cost of financing a vehicle through an auto dealer.").

(208.) Willis, supra note 164.

(209.) BULLETIN, supra note 2, at 4-5.

(210.) See Willis, supra note 164.

(211.) See id.; see, e.g., Settlement Press Release, supra note 88.

(212.) See Foster et al., supra note 92, at 2; see also supra notes 203-11 and accompanying text.

(213.) Letter to Senators, supra note 55, at 5.

(214.) See Foster et al., supra note 92, at 2.

(215.) See generally 12 U.S.C. [section] 5516(d) (2012) (showing that the CFPB is limited in its authority over smaller lenders).

(216.) Chanin et al., supra note 81, at 1; Richard Cordray, Dir., Consumer Fin. Protection Bureau, Prepared Remarks at the Clearing House Annual Conference (Nov. 21, 2013), available at http://www.consumerfmance.gov/newsroom/director-cordray-remarks-at-theclearing-house-annual-conference/.

(217.) See 12 U.S.C. [section] 5516(d) (limiting the CFPB's jurisdiction over small lenders with assets less than $10 billion).

(218.) Chanin et al., supra note 81, at 1.

(219.) See Senate Letter, supra note 7 (asking for the CFPB's basis for its assertion that discrimination exists in indirect auto lending).

(220.) See NADA Statement, supra note 7.

(221.) See generally Letter to Senators, supra note 55; Letter to Congress, supra note 60.

(222.) See generally Letter to Senators, supra note 55; Letter to Congress, supra note 60.

(223.) See Letter to Senators, supra note 55, at 4-5; see also Letter to Congress, supra note 60.

(224.) See Letter to Senators, supra note 55, at 4-5.

(225.) See Hogan et al., supra note 5; see also Settlement Press Release, supra note 88.

(226.) See Hogan et al., supra note 5.

(227.) See id.

(228.) See Settlement Press Release, supra note 88.

(229.) See id.', see also Twp. of Mt. Holly v. Mt. Holly Gardens Citizens in Action, Inc., 2013 U.S. LEXIS 8414 (U.S. 2013) (demonstrating the most recent case to settle on discrimination claims rather than test a theory of liability that has remained unchallenged at the Supreme Court for over 30 years, despite a grant of certiorari by the Court).

(230.) CTR. FOR RESPONSIBLE LENDING, supra note 32, at 4.

(231.) See supra Part III.

(232.) See id.

(233.) 12 U.S.C. [section] 5511(a) (The purpose of the CFPB includes ensuring that "markets for consumer financial products and services are fair, transparent, and competitive.").
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Title Annotation:Consumer Financial Protection Bureau
Author:Perez, Kim B.
Publication:North Carolina Banking Institute
Date:Mar 1, 2014
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