The Division of Banks issued a statement on April 29 recommending that Massachusetts depository institutions engaged in indirect auto lending follow recent CFPB guidance on compliance with the fair lending requirements of the Equal Credit Opportunity Act (“ECOA”) and its implementing regulation, Regulation B. CFPB Bulletin 2013-02, released on March 21, discusses compliance issues for lenders that have policies that permit auto dealers to increase consumer interest rates and then compensate the dealers with a share of the increased interest revenues, commonly called a “reserve” or “participation.” According to the CFPB bulletin, such markup and compensation policies create significant risk of pricing disparities on the basis of race, national origin and potentially other prohibited bases because of the incentives the policies create. Under ECOA, it is illegal for a creditor to discriminate in any aspect of a credit transaction because of race, color, religion, national origin, sex, marital status, age and other prohibited bases. Indirect auto lenders may be considered creditors under ECOA and Regulation B if, in the ordinary course of business, they regularly participate in credit decisions. Under certain circumstances, such indirect auto lenders may be liable for pricing disparities on a prohibited basis caused by an auto dealer or dealers. According to the guidance, the disparities triggering liability could arise either within a particular dealer’s transactions or across different dealers within the lender’s portfolio.
Nutter Notes: The CFPB guidance recommends that indirect auto lenders, including banks, take steps to ensure that they are operating in compliance with ECOA and Regulation B as applied to dealer markup and compensation policies. The recommendations include imposing controls on dealer markup and compensation policies and monitoring the effects of those policies so as to address unexplained pricing disparities on prohibited bases. The guidance also recommends eliminating dealer discretion to mark up interest rates and fairly compensating dealers using another mechanism that does not result in discrimination. The CFPB guidance lists features of a robust fair lending compliance program applicable to indirect auto lending, including an up-to-date fair lending policy statement, regular fair lending training for all employees involved in credit transactions, officers and board members, and ongoing monitoring for compliance with fair lending policies and procedures. The guidance also recommends that a compliance program include ongoing monitoring for compliance with other policies and procedures that are intended to reduce fair lending risk, review of lending policies for potential fair lending violations, including disparate impact, and regular analysis of loan data in all product areas for potential disparities on a prohibited basis, depending on the size and complexity of the institution.