In March 2013, the U.S. Consumer Finance Protection Bureau (“CFPB”) announced that it would closely scrutinize dealer reserve (“markup”) practices. The federal concern is that dealer markups may result in an illegal disparate impact (e.g., pricing disparities on the basis of race, gender, or national origin) in violation of the Equal Credit Opportunity Act (“ECOA”), which bans discrimination in lending. This illegal impact may be both unintentional and undetected by the auto dealer.
The CFPB says it will hold lenders responsible for dealers’ loan practices. While auto dealers generally are not subject to the jurisdiction of the CFPB, the Bureau does have jurisdiction over banks. The CFPB says that “disparities triggering liability could arise either within a particular dealer’s transactions or across different dealers within the lender’s portfolio. Thus, an indirect auto lender that permits dealer markup and compensates dealers on that basis may be liable for these policies and practices if they result in disparities on a prohibited basis.”
The CFPB requires lenders to monitor dealers’ markup practices. This has prompted some lenders to send letters to dealers regarding ECOA compliance and monitoring. A dealer should expect its deal data and loan practices to be monitored and scrutinized by lenders.
A dealer must be concerned about complying with the ECOA and avoiding liability for violations which can include significant dollar damages. Generally, expert statistical analysis would be necessary to evaluate whether there has been an unintentional but illegal disparate impact. This means that a dealer can violate the law without realizing it.
What should dealers do? Dealers should re-examine their markup practices and consider whether to change them. The CFPB suggests that steps to comply with the ECOA “may include”: (1) revising markup policies and monitoring the effect of those policies so as to address unexplained pricing disparities on prohibited bases; or, (2) eliminating variable markups and receiving a flat fee per transaction.
If a dealer continues to apply markups that can vary from customer to customer, the dealer should consider implementing an “objective” process which allows deviation from a standard markup only for an objective reason which is recorded and retained for review. This is not a “safe harbor,” but it may help later to explain price disparities. This objective process would require ongoing training, supervision, record-keeping, and monitoring.
In light of the new federal focus on lenders and dealer markups, NOW is the time for dealers to review their markup policies and practices.