Remember a time before the CFPB? Believe it or not, everyone’s favorite regulatory agency (read those last few words in whatever tone you’d like) is only 5 years old. But where we are in the Consumer Financial Protection Bureau’s overall saga is hard to say. President Donald Trump has expressed skepticism toward the agency, and his Republican allies in Congress aren’t exactly fans of it either. Now that the GOP controls every branch of government, the next stage of the CFPB may look drastically unlike what we’ve seen up until now.
In a recent Compli webinar, our hosts Michael Benoit and Kynzie Sims offered some answers and perspectives on our current uncertain regulatory climate. Michael started us off with a history lesson, because to understand the CFPB’s future, you should to look at its past. And to understand how and why the CFPB got started, you need to understand what attorneys and lawmakers call “disparate impact.”
What Is Disparate Impact?
Before the CFPB existed, it was up to the Federal Reserve Board, the Federal Trade Commision, the Department of Justice, and various banking agencies to enforce the Equal Credit Opportunity Act. Enacted in 1974, the ECOA makes it illegal for a creditor to discriminate in any aspect of a credit transaction on a prohibitive basis such as gender, race, ethnicity, or marital status.
The Federal Reserve Board went a step further than that, and interpreted the law to prohibit any credit practice that is discriminatory in effect. That is, regulators looked at practices that may appear neutral, and creditors who may not have intended to discriminate, for evidence of a disproportionate negative impact on a particular protected class. Disparate impact has long been a source of contention in the auto financing industry. Certainly, almost no one wants to harm a particular group , but industry stakeholders disagree about the scope and severity of this larger, more amorphous form of discrimination. Throughout the 1990s and early 2000s, several lawsuits intensified and complicated the debate.
The formation of the CFPB was, among other things, an opportunity for champions of the disparate impact theory to restrict the actions of auto lenders, as regulators determined that discretionary dealer mark-ups could disparately impact minorities. Thus began the continuous push and pull between the CFPB and finance companies.
What Changed in 2016?
Then, last year, everything changed. The outcome of Texas Dept. of Housing & Community Affairs v. Inclusive Communities Project dealt a blow to disparate impact claims, Trump was elected President, and the CFPB issued a statement about its new direction:
Because the Consumer Bureau is responsible for overseeing so many products and so many lenders, we re-prioritize our work from time to time, to make sure that we are focused on the areas of greatest risk to consumers. For example, we have examined over a dozen of the nation’s largest auto lenders and achieved important market awareness and movement, and we believe that a wide range of supervisory compliance solutions tailored to each lender will work to secure and advance our progress in protecting consumers.
Essentially, the CFPB deemphasized fair lending enforcement against indirect finance companies in favor of supervisory action, the DOJ may or may not continue to enforce under the Trump Administration, and a fundamental question hangs over it all: Do the CFPB and DOJ even want to litigate disparate impact?
What Should Lenders Do Now?
While there’s perhaps more leeway for auto lenders, Michael and Kynzie were quick to point out that the CFPB’s future does not mean finance companies are completely unregulated—far from it, in fact.
Dealers should continue to monitor their fair lending programs, as they could be liable individually for intentional discrimination, and finance companies and banks are likely to continue looking for violations in order to keep themselves in compliance. At the same time, states are stepping up their own enforcement.
Now that you know the past, present, and future of the CFPB, can you confidently say that your compliance management system is ready for what lies ahead? Find out what crucial components you may be missing—watch the archived version of Fair Lending in the Trump Era on demand.
PS – This is just a small taste of Michael and Kynzie’s conversation. The webinar wrapped up with an extensive question and answer session, and you don’t want to miss out on the the information our hosts provided. Check back on our blog in the next few days and weeks as we continue to explore these topics and share more takeaways about the CFPB, Trump, and upcoming regulatory trends.