CFPB Issues Guidance on Indirect Auto Lending ECOA Compliance

 The Consumer Financial Protection Bureau has issued guidance on fair lending compliance for indirect auto lenders. The guidance targets the practice of “dealer markups.” This practice involves an auto dealer charging the consumer a higher interest rate than the rate at which the indirect lender is willing to purchase the consumer’s retail installment contract. The dealer shares in the additional revenue generated by the higher rate.

Although the guidance applies to all banks and nonbanks subject to CFPB jurisdiction, its potential impact will be most immediately felt by the large banks and credit unions with assets of more than $10 billion, as well as their affiliates, that are subject to the CFPB’s supervisory authority. Unless and until the CFPB adopts a rule extending its supervisory authority to nonbank finance companies as “larger participants,” it cannot examine the nonbank lenders targeted by the guidance. Because such nonbanks are subject to CFPB enforcement authority, however, the guidance demands their close attention.

Highlights of the guidance are outlined below.

  • The CFPB is “likely” to consider an indirect auto lender to be a “creditor” subject to the Equal Credit Opportunity Act (ECOA) and Regulation B if, after evaluating a buyer’s information, the lender gave the dealer an interest rate at which it would buy the contract, or the rate on a contract purchased by the lender was higher than the rate on the lender’s rate sheets.
  • To establish an indirect auto lender’s ECOA liability for pricing disparities on a prohibited basis that exist within its portfolio, the CFPB intends to use a disparate treatment or disparate impact theory.
  • Because they “result” from the lender’s practice of giving dealers discretion to set interest rates, allegedly without regard to buyers’ creditworthiness, and compensating for markups, the CFPB considers pricing disparities on a prohibited basis to be an indirect lender’s own ECOA violation. Therefore, in the CFPB’s view, the Regulation B rule that a creditor can be liable for another creditor’s discriminatory practice only if it knew or had reasonable notice of such practice does not shield an indirect lender from ECOA liability for pricing disparities.
  • The guidance recommends that indirect lenders take steps to limit their fair lending risk, such as imposing controls on their dealer markup and compensation policies or eliminating dealer discretion to markup rates. Instead, it says they should use a flat fee per transaction or other method to compensate dealers. It also recommends development of a robust fair lending compliance management program, and, if a lender retains a dealer markup and compensation policy, that it implement systems for monitoring and corrective action.
  • As elements of systems for monitoring and corrective action, the guidance lists communicating with dealers regarding ECOA compliance, conducting regular dealer-specific and portfolio-wide pricing analyzes to identify potential pricing disparities on a prohibited basis, and taking prompt corrective against dealers and promptly remunerating affected consumers when unexplained pricing disparities are identified.

On April 16, 2013, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “Auto Finance Industry in the CFPB's Crosshairs.” More information on the webinar and a link to register can be found here.

To help consumer credit providers prepare for examinations and to prevent, manage, and defend against the increasing number of fair lending challenges, Ballard Spahr has created a Fair Lending Task Force. The task force brings together regulatory attorneys who deal with fair lending law compliance (including the preparation of fair lending assessments in advance of CFPB examinations), litigators who defend against claims of fair lending violations, and attorneys who likewise understand the statistical analyses that underlie fair lending assessments and discrimination claims.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

The Group produces CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe, use the link provided to the right.

For more information, please contact Practice Group Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, Fair Lending Task Force Leader Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com, or John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com.