Today (March 21, 2013), the CFPB released a bulletin warning indirect auto lenders that that the Bureau intends to “pursue” -- under the federal Equal Credit Opportunity Act (ECOA) -- those that fail to impose proper “controls” on dealer markups and allow dealer pricing discretion that the CFPB deems discriminatory to protected classes. 

The ECOA makes it illegal for a creditor to discriminate against in connection with a credit transaction on the basis of age, color, marital status, national origin, race, religion, sex, receipt of income from any public assistance program, or the exercise, in good faith, of a right under the Consumer Credit Protection Act (such as TILA, FCRA etc.).  Although assignees who participate in or influence the credit decision are creditors for ECOA purposes, it is likewise true that most auto finance transactions are color blind because lenders who purchase sales contracts from dealers have no idea whether the applicant is white, black or purple.  That said, the CFPB does not regulate dealers.  Moreover, unlike mortgage lending, no federal law requires auto finance companies to gather this information.  In the 1990’s, however, the plaintiffs’ bar pursued a wave of class actions against captive auto finance companies, accusing them of practices that had a disparate impact on consumers. Leaving aside the questionable legal grounds for a disparate impact claim under ECOA (see, e.g., Smith v. City of Jackson, 544 .S. 228 (2005) (disparate impact claims allowed in employment cases based on specific “effects” language in Title VII not found in ECOA),  these suits led to changes in the way lenders paid dealers for negotiating the retail installment sales contracts that indirect lenders ultimately purchased from them.  Having resolved these issues by adjusting their policies, most in the industry thought discrimination claims were a thing of the past.

The March 21 “guidance” follows earlier signals that this was on the Bureau’s agenda.  But still, there was no public comment period, no proposed regulations.  Just this guidance, along with the statement affirming its “authority to pursue auto lenders whose policies harm consumers through unlawful discrimination.”  And, as one might expect from this approach, the CFPB’s perspectives reflect the lack of any industry voice.  Indeed, the CFPB guidance avoids the language of ECOA, asserting that, if disparities are found, “lenders may be liable under the legal doctrines of both disparate treatment and disparate impact.”  Its support for this proposition is, conveniently, the Bureau’s own internal legal analyses.  Smith v. City of Jackson goes unmentioned.   So what would the CFPB need to show to prove disparate impact?  Glad you asked. Under disparate impact, the government need not show any intent to discriminate. Instead, the CFPB need only show that an otherwise neutral practice has a discriminatory impact on members of a protected class.  Once this is established, the burden shifts to the lender to show a legitimate business justification for the practices at issue.

That said, is the mere purchaser of a retail installment sales contract liable as a creditor?  The answer is not always obvious, and the CFPB acknowledges that.  But the CFPB will deem the purchaser of those contracts a creditor for ECOA purposes if, as is commonly the situation, that entity “provides rate sheets to a dealer establishing buy rates,” “allows the dealer to mark up those buy rates,” and then “ purchases a contract from such a dealer.”  The CFPB analysis continues:

“Some indirect auto lenders may be operating under the incorrect assumption that they are not liable under the ECOA for pricing disparities caused by markup and compensation policies because Regulation B provides that “[a] person is not a creditor regarding any violation of the [ECOA] or [Regulation B] committed by another creditor unless the person knew or had reasonable notice of the act, policy, or practice that constituted the violation before becoming involved in the credit transaction.”

This provision limits a creditor’s liability for another creditor’s ECOA violations under certain circumstances. But it does not limit a creditor’s liability for its own violations — including, for example, disparities on a prohibited basis that result from the creditor’s own markup and compensation policies. Additionally, an indirect auto lender further may have known or had reasonable notice of a dealer’s discriminatory conduct, depending on the facts and circumstances.”

In other words, the CFPB argues: (1) that, notwithstanding ECOA’s express language, indirect lenders are liable even for a dealer’s compensation policies that result in discrimination; and (2) that the Bureau will consider an activity as intentional discrimination (and therefore covered by disparate treatment analysis) if the lender could be deemed to have “reasonable” notice of the dealer’s actions.