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Bill would reverse federal guidance on discriminatory car lending

When you buy a car, there is typically no set price. The final price and terms be negotiated with the dealer, often with little information on the part of the consumer. As a result, it can be easy for unscrupulous dealers to take advantage of people -- and studies have shown that the people being taken advantage of are African-Americans and Hispanics.

In 2013, after the Consumer Financial Protection Bureau (CFPB) confirmed that trend, the agency issued policy guidance to dealerships stating that car loans are governed by the Equal Credit Opportunity Act.

When an agency issues guidance, it is merely making a statement of its own interpretation of the relevant law. This differs from a federal regulation, which has the same authority as the law it serves to interpret.

Regulations are the result of a formal rulemaking process with a public comment and agency response period before the final regulation is published. Guidance can be issued after an internal process only. Therefore, there have traditionally been many questions about how much deference guidance deserves.

When the CFPB issued its guidance about auto lending, congressional Republicans argued the agency had exceeded its authority. Auto dealers insisted the studies the agency relied on were flawed and went so far as to deny that bias plays any role in pricing. They also predicted the guidance would limit consumers' access to good rates on auto financing.

In reality, studies indicate that discriminatory pricing has continued despite the guidance. Civil rights advocates claim the lack of progress is due to limited enforcement of the Equal Credit Opportunity Act by the CFPB.

Now, Congress may be taking a step to clarify the situation -- although not in consumers' favor. Earlier this month, the Senate passed a bill to reverse the CFPB's guidance. If the same bill passes the House, there would no longer be any guidance on whether auto lending is governed by the Equal Credit Opportunity Act.

That would not necessarily mean that the Equal Credit Opportunity Act doesn't cover auto lending. It would simply mean that a formal regulation or court ruling would make that determination.

Should the Equal Credit Opportunity Act apply to car loans? Yes, if it would protect consumers from discriminatory lending. That said, there is an argument to be made that agencies should be discouraged from issuing policy guidance instead of going through the official rulemaking process to produce regulations. Guidance is an easier method of making rules, but only regulations have the force of law.

The bill now moves to the House where it will probably receive a warm reception.

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