Congressional Review Act Confusion: Indirect Auto Lending Guidance ...

Part of the legacy of Newt Gingrich and his Contract with America (can I get damages for breach?) is the Congressional Review Act.  The CRA creates a mechanism whereby Congress can override an agency rulemaking on a simple majority vote in both houses, meaning that it is not subject to the filibuster in the Senate. Congress has only used this tool infrequently, most notably with the CRA resolution overriding the CFPB's arbitration rule. 

Some members of Congress have now turned their CRA sights on various regulatory "guidance" that they find objectionable. This guidance is not formally binding and enforceable law, but other sorts of communications from agencies that help regulated entities understand agency expectations, interpretations, and policies. Among this guidance is the CFPB's Indirect Auto Lending Guidance. I suspect that most of the folks who rail against it have never actually bothered to read it. It's a short document. Most of it is spent explaining what indirect auto lending is. In brief, you can get a car loan from a direct lender who makes the loan directly to you or you can get the loan from the dealer. If you get the loan from the dealer, the dealer will typically turn around and sell the loan to the real lender.  (The exception are buy-here-pay-here used car dealers who keep the loans.)  These indirect lenders include captive finance companies of auto manufacturers, but also banks (e.g., Santander has a large business in this space). The indirect lenders compete for dealer business, not for consumer business, and therein lies the problem. The indirect lenders set a "buy rate"--the minimum interest rate and other terms on the loan at which they will purchase it, but then allow dealers to markup the loan above the buy rate (this is the "dealer reserve," which looks an awful lot like the now-prohibited yield spread premiums on mortgages paid to mortgage brokers).  This sets up a situation in which dealers might engage in discriminatory markups in violation of the Equal Credit Opportunity Act. The question is whether the indirect lenders face any liability for such discriminatory markups.  

The CFPB's Indirect Auto Lending Guidance notes that this is a possibility as indirect lenders can potentially qualify as "creditors" under ECOA. The guidance then goes on to say that because there are compliance risks, here are some things that indirect lenders should consider doing as part of their compliance programs.  Critically, the guidance doesn't actually say that the CFPB believes that dealers ar "creditors" under ECOA, only that it is possible that they could be, nor does it require that dealers do anything.

It's not clear if there are the votes in Congress to pass the CRA resolution, but even if there are, there are still a bunch of legal questions about whether such a resolution can validly be passed in regard to the Indirect Auto Lending Guidance and what its impact would be. These are discussed below the break. My short answer is that it is very questionable whether the CRA has any application of the Indirect Auto Lending Guidance and even if it does, it is unlikely to have much impact as it doesn't invalidate ECOA or ECOA enforcement actions against indirect lenders. This then raises the question of why the (GOP) wants to spend political capital pursuing a rather pointless resolution.  

Is this even a "rule"?

The CRA applies only to "rules."  Is this CFPB's Indirect Auto Lending Guidance a "rule"? Certainly not as anyone colloquially uses that term. In administrative law, "rules" mean notice-and-comment rulemaking, and anything else falls into the residual buckets of guidance or communications. But the CRA defines "rules" as:

the whole or a part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency...

Even under this broader technical definition, it's far from clear to me that the Indirect Auto Lending Guidance is a rule. There's other language in the CRA indicating what is meant by a "rule".  The CRA states that a rule may not "take effect," until the rule and its proposed effective date have been transmitted to Congress.  That provision strongly implies that the CRA only applies to rules that have "effective dates," meaning that they are rules that have "effects." Non-binding guidance would hardly seem to fit that description.  How can it have an "effective date" if it doesn't "take effect"?  What would it mean for guidance not to "take effect" if it hasn't been submitted to Congress?  All of this suggests that the term "rule" in the CRA means what we normally think of as a "rule," and not some technical definition.  

Even if one thinks that the technical definition of "rule" is really what applies, does the Indirect Auto Lending Guidance fit that definition?  I think it's questionable. There are three parts to the definition:  

•  First, there must be a "an agency statement of general or particular applicability."  That part is met.  

•  Second, it must have "future effect".  The guidance doesn't have any "effect", so how can it have a future effect if it doesn't bind?  

•  And third, it must be "designed" to "interpret law" or "prescribe ... policy". Note that it is not a question of whether it actually "interprets law" or "prescribes ...policy," but whether it is designed to do so.  That seems to hinge on agency intent, which would seem to require more facts than anyone really has available.  But maybe the "design" can be deduced from the document itself.  That would require evidence that the document is designed to interpret ECOA and Reg B. But if this is an interpretation, it's pretty darn thin.  The guidance states that:

Noting that an indirect lender could fit the ECOA definition of "creditor" and "may" have ECOA liability hardly seems like an interpretation of law. I'd think of an interpretative rulemaking as stating something like "It is the Bureau's position that an indirect lender that does X, Y, and Z is a 'creditor' under ECOA and Reg B." Nor is the guidance obviously  announcing a policy--it doesn't say, "The Bureau will bring enforcement actions in the following circumstances." Instead, it says:

 Perhaps there's an implicit enforcement threat, but it's pretty oblique. Instead, I see this guidance as a sort of "heads up, there might be compliance issues here that you guys aren't aware of, so here's what you should be thinking." 

But what about the GAO determination? 

Now, the CRA resolution to repeal the Indirect Auto Lending Guidance relies on a GAO determination, in response to an inquiry from Senator Toomey, that the Guidance is a "rule" for CRA purposes. I don't know why the GAO's opinion matters a whit here. It has no legal effect as far as I can tell, and I don't think it would get any deference from a court. (Indeed, GAO arguably overreached its authority by issuing such an opinion in response to a request from a member of Congress given that the specific tasks allocated to it under the CRA do not include making the determination.) All of which is to say that perhaps this is a rule, perhaps it is, and no one really knows conclusively. 

If this isn't a rule, then what is the effect of a CRA resolution?

It would be a joint resolution signed by the President, but passed according to improper procedure. Perhaps it would still be an effective resolution, as courts aren't going to question the procedures by which a bill was adopted, but I don't think it would get the benefit of the CRA's statutory effect of prohibiting the reenactment of a rule that is "substantially the same." If so, a CRA resolution would have little effect. 

If it is a rule, what then?  

If the guidance is a rule, then a CRA resolution is arguably either too late or too early.  There's an argument that the time line for a resolution has run--I imagine it's sort of a laches argument, and who knows if there are laches against Congress. But if the rule was never presented to Congress, the CRA timeline hasn't been triggered so a resolution is too early, and I again think that it would likely be a valid resolution as far as it goes, but that it wouldn't have the statutory effect of a CRA resolution.  

If there is a valid CRA resolution overturning guidance, what does that mean? 

To get to the answer here, let's start with an easier question. Suppose there is a CRA resolution that overturns a rule, as happened with the CFPB's Arbitration Rule. What's the effect of that? According to the CRA, it means that (1) the rule cannot be "reissued in substantially the same form and (2) "a new rule that is substantially the same as such a rule may not be issued." But what does that actually mean?

First, note that the language used is "substantially the same," not "substantially similar" as people often misquote the CRA. That distinction may matter. I read "substantially the same" as arguably requiring at least 50% overlap, if not more. I also read "the same" as requiring something more than "similar." "The same" would seem to imply closer substantive overlap if not actual linguistic overlap. "Similar" seem a more forgiving standard.  

Second, the two prohibitions need to be read with each other. The first prohibition is against reissuance, while the second is against a new rule. What is "the same form" for the first prohibition on reissuance?  Does that mean the same substance or does it mean "the same sort of rule".  That is, if a CRA resolution overturns a rule that is not issued through notice-and-comment, does that then prohibit a later notice-and-comment rulemaking? It's unclear. I think it doesn't under the first prohibition, but the second prohibition is what would prevent that, but that takes us right back to whether it is "substantially the same"? Is a notice-and-comment rule ever the same as one that is not?  Indeed, "the same" might even refer to the process of enactment as much as the substance of the rule. No one really knows because the CRA doesn't explain this, and there's no court cases explicating things not least because the CRA prohibits judicial review. 

Is the CRA justiciable, and who has standing to challenge non-binding guidance? 

Suppose, then, that a CRA resolution overturned a notice-and-comment rulemaking and then an agency reenacted the rule, verbatim. Could a court hear that challenge? I have to think that the answer is yes.  The rule could be challenged under the APA, rather than under the CRA, on the grounds that the agency lacked the authority to enact the rule. It would bootstrap a CRA claim into an APA claim. There's some question of whether this could be done--certainly the agency would argue that the CRA provision is not justiciable.  

The point here isn't whether the CRA is ultimately justiciable, however. Even if it is in the context of a notice-and-comment rulemaking, it's not in the context of non-binding regulatory guidance. Suppose that a CRA resolution overturned guidance and then an agency reenacted the guidance, verbatim. Could a court hear that challenge? Not unless someone had standing to challenge the guidance. And who would?  If it's non-binding guidance, there's no party with standing because there's no injury in fact. Robins v. Spokeo is a two-edged sword it seems.  

The CRA doesn't prohibit enforcement actions (including by state AGs) or informal guidance that aligns with an overturned rule

Let's suppose that an agency were to believe that it were bound by a CRA resolution on non-binding guidance, even if no one would have standing to challenge it. (There's both a principled and a conflicted-agent way for a general counsel to reach that conclusion.) What prevents an agency from simply following the policy announced in the non-binding guidance?  Nothing so far as I can see.  The CRA doesn't have any prohibition against that.  

So to apply this to the CFPB, what would prevent the CFPB from continuing to bring UDAAP and ECOA actions against indirect auto lenders that permit dealers to engage in discriminatory markups? Zilch. Even if there is a valid CRA resolution overturning the Indirect Auto Lending Guidance, indirect auto lenders still face potential ECOA liability for discriminatory markups. A CRA resolution does nothing to change that.  I cannot over-emphasize this point. A CRA resolution doesn't change ECOA and Reg B. 

Likewise, what would prevent the CFPB's supervision team from telling indirect auto lenders that they risk UDAAP and ECOA actions if they permit dealers to engage in discriminatory markups?  Again, zilch. The CRA prevents only the reenactment of a rule that is "substantially the same." If there's no "rule," just informal guidance, that's surely not prohibited.  

It's clear that the Mulvaney CFPB isn't going to be pursuing indirect auto lenders for ECOA violations. But Mulvaneyshchina isn't going to last forever, and if you're an indirect auto lender, you might reasonably recall that the statute of limitations for UDAAP and ECOA are three years and five years respectively. Even with a CRA resolution, any indirect auto lender that allows discriminatory markups is taking a gamble that there won't be a more vigorous CFPB in the future that will go after them for ECOA and UDAAP violations that occurred on Mulvaney's watch. And a CRA resolution does not void the consent orders that the CFPB entered into with a number of indirect auto lenders. Those will remain valid.  

Now recall one more thing:  the CFPB Indirect Auto Lending Guidance is just guidance—at most—about how the CFPB interprets ECOA (and I think that's overreading it). The CFPB, however, isn't the only entity that can enforce ECOA or UDAAP.  The DOJ can enforce ECOA and the state attorneys general can enforce UDAAP (and possibly also ECOA if the enumerated consumer laws are incorporated as part of title X of Dodd-Frank). Neither is bound by CFPB guidance. The Massachusetts AG has already gone after discriminatory markups in indirect auto lending. Getting rid of the CFPB guidance doesn't get rid of the state AG enforcement threat. All it does is remove clarity for indirect lenders because to the extent the guidance exists, it may constrain the CFPB. Without the guidance, there are no constraints on how the Bureau proceeds with ECOA enforcement. 

Put this all together and I don't think anyone can have a lot of faith that a CRA resolution on the Indirect Auto Lending Guidance is going to make much of a difference for indirect auto lenders or (and this is the real game, I think) auto dealers.  We might call it "The Fast and the Pointless".  This makes me think that the whole push for a CRA resolution to overturn the CFPB's Indirect Auto Lending Guidance is nothing but demonstrative theater for part of the GOP's base, a basis for passing the collection plate around to auto dealers and indirect lenders, much like the endless attempts to repeal Obamacare were. 

There's a way to test my theory:  if the resolution passes, watch the client alerts and the like that law firms put out. I'm betting that they'll suddenly start pointing out all of the things I've pointed out here--that the CRA resolution in no way gets rid of ECOA liability, even to the CFPB, and that there's a 5-year statute of limitations, so it's best to keep doing business as if the Guidance were still in effect.