Congress rebukes CFPB’s bureaucratic overreach

Last month, President Trump and Congress took an unprecedented step against bureaucratic overreach. They used the Congressional Review Act to eliminate one of the many thousands of edicts that federal agencies impose on Americans each year without public participation or judicial supervision. The edict in question was a Consumer Financial Protection Bureau “bulletin” that threatened to punish certain financial institutions unless they imposed controls on the interest rates offered by auto dealers.

The CFPB’s rationale was that the interest rates offered by auto dealers were discriminatory. But then, why not directly regulate the auto dealers themselves?

The answer is that Congress explicitly exempted auto dealers from the CFPB’s broad reach, while allowing other agencies to continue regulating them. Under President Barack Obama’s chosen director, Richard Cordray, the CFPB determined not to let the law get in its way. Within a month of taking office, Cordray created a task force to study how to extend his reach to auto dealers, despite the statutory exemption. The task force came up with an ingenious plan: Regulate auto dealers indirectly by going after the financial institutions — known as indirect auto lenders — that purchase the dealers’ auto loans.

In the now-defunct bulletin, the CFPB set forth its plan of evasion. The Bureau could not prove that indirect auto lenders actually discriminate on the basis of race, because by law, indirect auto lenders are prohibited from asking about the race of the borrower. Instead, the CFPB threatened to charge indirect auto lenders with discrimination if their failure to control auto dealers’ lending practices resulted in higher interest rates for racial minorities. In other words, the bureau told lenders to regulate auto dealers on its behalf — or else.

What kind of agency would have the gall to circumvent Congress’s express limitation on its jurisdiction this way? The kind of agency that is not subject to Congress’s power of the purse. Unlike other agencies, the CFPB’s director can simply demand hundreds of millions of dollars from the Federal Reserve every year without congressional approval. And the president cannot fire him, except for cause. This frees the director to disregard elected officials and to pursue his own priorities outside the law.

By exercising its prerogative to kill the CFPB’s auto-lending bulletin under the Congressional Review Act, Congress did not simply enforce the jurisdictional limitation that Cordray had flouted; it also took a stand against racial stereotyping. Under Cordray, the CFPB had built its case against indirect auto lenders using an algorithm based on outdated census data that assigned race and ethnicity probabilities to borrowers based on their zip code and last name, and then used those probabilities to determine whether minorities were paying higher interest rates. Cordray relied on this methodology even though his own staff had warned that it was biased and inaccurate, a warning that was later confirmed by outside statisticians.

Photo: AP Photo/Jacquelyn Martin