In 2013, the Consumer Financial Protection Bureau (CFPB) issued a bulletin on indirect auto lending that took the industry by storm. As we approach the five-year anniversary of the memo’s issuance, it’s valuable to reflect on how the bulletin was received, how the auto finance industry has changed since the bulletin and subsequent CFPB actions, and how the industry and regulators can learn from the experience to improve their efforts to remove discrimination from the car buying experience.

CFPB Bulletin 2013-02, Indirect Auto Lending and Compliance With the Equal Credit Opportunity Act, was the CFPB’s first public foray into regulating the auto finance industry. In the bulletin, the CFPB articulated the agency’s concerns over dealer markup incentives that could result in auto finance companies participating in discriminatory lending practices that violated ECOA.

The bulletin included allegations of discriminatory practices at the lender and dealership level and suggested a number of potential compliance solutions that auto finance companies could implement to reduce the risk of violating ECOA. Since that time, the CFPB has added nonbank auto finance companies to its list of regulated larger market participants, auto finance companies have reached settlements with the CFPB related to fair lending practices, and the U.S. Government Accountability Office (GAO) has concluded that the bulletin was a rulemaking that should have been subject to the Congressional Review Act.

Below are five takeaways that have emerged since the bulletin was issued.

1. Reaction from the auto industry was swift – many participants were stunned and irate.

The industry felt blindsided when the CFPB issued the bulletin without much warning. Many nonbank auto finance companies had not historically had relationships with federal regulators and thought the auto industry was going to largely get a pass from the CFPB after auto dealers had specifically been exempted from the CFPB’s oversight in the Dodd-Frank Act. Worst of all, many industry participants interpreted the bulletin as the CFPB accusing them of either having race-based lending policies or associating with auto dealers who profit by exploiting borrowers’ race or ethnicity.

The bulletin speculated about perceived problems in the industry and, unlike the CFPB’s Supervisory Highlights, did not point to hard examples of fair lending abuses occurring at dealerships or auto finance companies. For this reason, many industry participants felt that the CFPB was denouncing an entire industry without an adequate evidentiary basis.

While the CFPB initially had the authority to investigate nonbank auto finance companies through enforcement, it lacked supervisory authority over nonbank larger market participants until 2015. Thus, the CFPB relied on anecdotes, enforcement investigations and market research as the basis for the bulletin.

The bulletin served as the opening salvo between the CFPB and the auto finance industry. Rather than begin with an olive branch, this bulletin served as a shot across the bow.

2. Incentives that do not align with a consumer’s interest have and will continue to carry a high degree of regulatory risk.

If there is one theme that unifies post-financial crisis regulation, it is that regulators will heavily scrutinize any arrangement that results in a provider’s incentives not being aligned with consumers’ interest. In regulating the markets for retirement account counseling, securities trading, mortgage origination, depository account management and auto finance, regulators have adhered to the principle that companies should not be making greater profits by offering less favorable terms and services to consumers.

While the auto finance bulletin did not ban dealer reserve outright, the bulletin caused auto finance companies to reconsider how they structured dealer compensation programs. Even if future CFPB administrations do not enforce the auto finance bulletin, aggrieved consumers and their attorneys now have a roadmap for identifying discriminatory lending practices and bringing lawsuits to challenge them. Auto finance companies are more cognizant today about how their dealer compensation programs are structured, and that is unlikely to change regardless of the CFPB’s future regulatory direction.

3. Vendor management became a staple of auto finance companies’ compliance management systems.

Prior to the CFPB’s entry into auto finance regulation, auto finance companies were surely careful to consider dealers with whom they partnered based on traditional business metrics like profit margin, sales volume, geographic location and reputation. In the aftermath of the CFPB bulletin, however, auto finance companies added new criteria to evaluate dealers that wanted to join their lending network.

Auto finance companies have more closely scrutinized dealers’ compliance with fair lending laws as well as those dealers’ culture and cohesion with the auto finance company’s own policies and procedures. As a result, auto financiers have cut ties with certain dealers and other dealers have changed their markup practices to fall in line with the heightened expectations of auto finance companies and the CFPB.

While the CFPB bulletin did not result in widespread adoption of a flat fee compensation model for auto dealers, the bulletin’s lasting legacy may be that auto finance companies developed more stringent policies that dealers must follow to receive financing for consumers.

4. Statistical modeling is an imperfect solution to eliminating discrimination in auto financing.

The CFPB’s reliance on statistical modeling to identify discriminatory practices was perhaps the most frequently criticized element of its approach to regulating the auto finance industry. Since auto dealers are prohibited from collecting race and ethnicity data from consumers, the CFPB had to rely on statistical models based largely on surnames to identify occasions where credit decisions appeared to have been made based on illegal race-based criteria.

To the industry statisticians who understood the statistical model’s underpinnings, the model appeared to be flawed. And the many other industry participants who did not understand the underlying algorithms felt it fundamentally unfair to implicate a company for discriminatory lending practices based on a statistical model that the company did not have access to and did not use in underwriting decisions.

As the CFPB reached large settlements with lenders, the industry took note and lenders began to adopt statistical models to identify fair lending risks within their own institutions. While the CFPB may have relied too heavily on a statistical modeling approach, industry participants walked away with a compliance tool that allows them to identify potential fair lending abuses during compliance audits and dealership due diligence reviews.

5. Fair lending is a cause best served by industry and regulators working together.

It was perhaps the CFPB’s delivery, rather than the content itself, that caused the industry to recoil so emphatically against the bulletin. The CFPB did not hold a public forum on auto finance until eight months after issuing the bulletin.

Given the industry’s reaction to the bulletin, the CFPB would likely have been better off reversing the order of those events and gathering feedback from industry participants prior to issuing industry-altering guidance. At the same time, in the aftermath of the bulletin, the industry was best served by those companies and industry advocates that reacted to the bulletin by respectfully articulating to the CFPB the nature of the industry and how the overwhelming number of participants in the industry shared the CFPB’s goal of consumer protection and disdain for discriminatory practices.

The Next Five Years

Moving forward, auto finance companies that are directly or indirectly regulated by the CFPB will have the opportunity to engage with the Bureau to explain their business models and how compliance and fair lending are essential parts of their companies’ culture. The CFPB recently announced it will be issuing requests for information regarding numerous aspects of the agency’s approach to regulation. In light of this announcement, the time is right for the auto finance industry to collect its thoughts on the CFPB’s past five years of regulation and on how the industry wants this relationship to evolve.

The fate of the bulletin itself is not clear in the aftermath of the GAO’s conclusion that the bulletin constituted a rulemaking subject to the CRA. Whether the new CFPB administration or Congress will take action to amend or rescind the bulletin remains to be seen.

What is clear is that there is still a concern that fair lending abuses remain in the auto industry. A consumer advocacy group recently released a study that highlighted incidents of discrimination at the dealership level.

Whether the CFPB, emerging state-level actors or private practitioners are holding the handle, there will continue to be a magnifying glass on fair lending practices in the auto industry. Industry participants should continue to develop strong policies and procedures related to fair lending compliance, dealer incentives and service provider oversight to avoid becoming the subject of an enforcement action or consumer litigation and to ensure that all consumers are treated fairly when attempting to finance automobile purchases.