Senate poised to kill CFPB effort to prevent racial discrimination in auto loan market

A row of cars for sale at an auto dealership.
A row of cars for sale at an auto dealership.
(David Zalubowski / Associated Press)
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The Senate is poised to vote as early as Tuesday to rescind an Obama-era policy warning auto lenders and dealers against charging minority borrowers more than white borrowers.

The legislation, sponsored by Sen. Jerry Moran (R-Kan.), takes aim at one of the Consumer Financial Protection Bureau’s most controversial campaigns and addresses years of complaints by Republicans and the powerful auto industry that the watchdog agency had overstepped its bounds and used “junk science” to accuse lenders of racial bias.

It also comes as the Trump-appointed leader of the agency, Mick Mulvaney, works to tame the bureau’s ambitions and pledges that it no longer will push the legal envelope.


The auto lending guidance is the latest example of “runaway regulations,” Senate Majority Leader Mitch McConnell (R-Ky.) said Tuesday morning. Repealing it “will protect consumers from a brazen attempt by the past director of the Consumer Financial Protection Bureau to stretch his authority and interfere in the auto industry.”

Consumer advocates have said that repealing the CFPB policy would open the door to discriminatory practices. “We’re concerned that there is a lot of evidence that a person of color will get a worse loan than a similarly situated white one,” said Debbie Goldstein, an executive vice president of the Center for Responsible Lending.

The legislation, which has more than a dozen Republican sponsors, needs 51 votes to pass. After years of lobbying by the powerful auto dealers industry, the bill is expected to attract some Democratic support.

The fight centers on guidance issued by the CFPB in 2013 that took aim at a common industry practice in which auto dealers mark up interest rates offered by finance companies. Finance firms such as Ally, for example, set an interest rate based on objective criteria — including a borrower’s credit history and the size of the down payment. Auto dealers then are free to raise the interest rates within certain limits. The finance companies and the dealers split the extra profits.

The CFPB argued that auto dealers were using that discretionary markup to charge black and Latino borrowers more than white ones, even if they had the same credit scores. Over several years, the agency fined numerous auto lenders millions of dollars for discriminating against minority borrowers.

Ally Financial, one of the nation’s largest automobile lenders, paid $98 million after the CFPB accused it of charging 235,000 minority borrowers higher rates. On average, black, Latino and Asian American customers paid from $200 to more than $300 more for auto loans than did white customers who were equally creditworthy, federal officials alleged. American Honda agreed to pay $24 million to borrowers to settle its case, and Fifth Third Bank paid $18 million. None admitted wrongdoing.


Since then, some lenders eliminated discretionary dealer markups, while Republicans and the auto industry lashed out at the bureau’s guidance. Auto dealers said the guidance made it more difficult for them to offer consumers discounts on their car purchases out of fear they would be accused of discrimination. House Republicans launched a multiyear investigation into the matter, arguing that the CFPB used faulty data to support the policy.

The Times reported in 2016 that the bureau used an algorithm, one designed for healthcare research by a statistician at Santa Monica’s Rand Corp., to guess the race of auto loan borrowers based on their last names and addresses.

Rep. Jeb Hensarling (R-Texas) went so far as to call the method “junk science,” arguing a statistical model should not be used to accuse companies of racial bias. He and other Republicans also argued that the method is not foolproof and could result in settlement payments going to white borrowers.

Marc Elliott, the Rand statistician, said his algorithm was designed to be used for looking at racial disparities across large groups of people, not for trying to guess the race of particular individuals. “That’s an inherently harder question,” he told The Times.

The CFPB is barred from regulating auto dealers directly, but it found a door by extracting big fines from the auto lenders with which the dealers work, critics said. The financial reform law, known as the Dodd-Frank act, that created the watchdog bureau “got a lot of things wrong,” McConnell said. “But one thing Dodd-Frank got right was protecting auto dealers from meddling by the CFPB.”

Despite the consumer bureau’s new leadership, the auto industry has remained concerned about how and when the guidance would be enforced, industry officials said. “As long as this guidance is out there, there is the possibility that the CFPB will attempt to eliminate auto loan discounts for consumers,” said Jared Allen, spokesman for the National Automobile Dealers Assn.


The Republican legislation relies on the Congressional Review Act to rescind the guidance, a tool Republicans have used to block more than a dozen Obama administration rules. But Democrats and consumer advocates have objected, noting that the law has traditionally been used to rescind rules or regulations, which undergo months of public scrutiny, but not agency guidance, which is more informal. Republicans argue that in this case, the CFPB’s guidance is, in fact, a rule subject to a Congressional Review Act vote.

Times staff writer James Rufus Koren contributed to this report.


12:20 a.m.: This article was updated with Times staff reporting about the algorithm used to support the CFPB policy.

This article was originally published at 11:15 a.m.