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 analyses to identify potential pricing disparities on a prohibited basis, and taking prompt corrective action against dealers and promptly remunerating affected consumers when unexplained pricing disparities are identified.