The Consumer Financial Protection Bureau (CFPB) recently issued guidance stating that it intends to use its regulatory tools, including enforcement lawsuits, to address discriminatory practices in auto lending. The CFPB bulletin represents an important development for the exercise of its fair-lending authority, as well as its authority over auto loans.
Fair lending is a central part of the CFPB's mission. The Dodd-Frank Wall Street Reform and Consumer Protection Act established a dedicated Office of Fair Lending and Equal Opportunity within the CFPB, led by Assistant Director Patrice Ficklin. The Dodd-Frank Act also charges the CFPB to "ensur[e] that all consumers have access to markets for consumer financial products and services", and to exercise its authorities to ensure that consumers are "protected… from discrimination".
The CFPB has released fair-lending guidance: CFPB Bulletin 2012-04, issued on April 18 2012, states the CFPB's intent to follow the fair-lending principles outlined in Regulation B,(1) which the CFPB adopted in virtually the same form as it was previously issued by the Federal Reserve.(2) The CFPB affirmed its intention to apply Regulation B and the Equal Credit Opportunity Act(3) using the 'disparate impact' doctrine – also known as the 'effects test' – in addition to situations where there is overt discrimination or disparate treatment of a protected class. The CFPB's position is consistent with the prior statements of the Federal Reserve, and is similar to the express adoption of the disparate impact doctrine under the Fair Housing Act(4) by the Department of Housing and Urban Development in a recent formal rulemaking.(5)
To date, the CFPB has initiated no public enforcement actions in the fair-lending area. The CFPB has also not proposed or adopted any new fair-lending regulations. Among other things, the CFPB has proposed no regulations to implement Section 704B of the Equal Credit Opportunity Act,(6) which was added by Section 1071 of the Dodd-Frank Act and requires the collection and reporting of data on loans to small businesses, as well as businesses owned by women and ethnic minorities.
Policy statements issued by the CFPB in the auto-lending area provide useful guidance on the bureau's fair-lending enforcement priorities and positions.
Regulation of auto lending
Auto lending is an area that poses a particular jurisdictional question for the CFPB. Under the Dodd-Frank Act, auto dealers are exempt from the CFPB's jurisdiction – including its supervisory, rulemaking and enforcement jurisdiction.(7) The exemption is so broad that auto dealers are not even bound by the regulations of general applicability issued by the CFPB (eg, Regulation B under the Equal Credit Opportunity Act or Regulation Z under the Truth in Lending Act), but instead continue to follow the Federal Reserve's corresponding regulations.
However, the CFPB does have jurisdiction over other participants in the auto-lending industry. For large banks (with assets over $10 billion) that either make direct auto loans or purchase dealers' instalment contracts, the CFPB has supervisory, rulemaking and enforcement jurisdiction. Smaller banks do not face CFPB supervision or enforcement, but are still subject to its rules. Non-bank finance companies, which may either make direct loans or purchase dealer contracts, are subject to the CFPB's rules, as well as its enforcement jurisdiction under the Consumer Financial Protection Act and the Equal Credit Opportunity Act.
The practice that has drawn the most fair-lending scrutiny to the auto-lending market is dealer discretionary pricing. This practice allows a dealer to negotiate the loan price with the customer, and to keep the portion of the price that exceeds the base buy rate offered by the bank or finance company that will purchase the paper. Private plaintiffs and regulators have claimed that this practice results in a disparate impact on minority groups, causing them to pay higher rates than Caucasians as a result. Although any disparate treatment of protected classes would involve the actions of the auto dealers (which negotiate the price), plaintiffs have argued that the banks and finance companies are liable because their policy of allowing the discretionary pricing results in a disparate impact on minorities. In a recent rulemaking under the Fair Housing Act applicable to mortgages, the Department of Housing and Urban Development noted that "policies, practices, or procedures, including those that allow for discretion or the use of subjective criteria" may result in disparate impact.(8) Many of the major auto lenders entered into significant settlements regarding these practices. These include:
- Coleman v GMAC;(9)
- Jones v Ford Motor Credit;(10)
- Smith v Chrysler Fin Co;(11) and
- Cason v Nissan Motor Acceptance Corp.(12)
Similar claims regarding the disparate impact of discretionary pricing policies have been brought against mortgage lenders. In 2012 the Department of Justice settled such claims against Countrywide and Wells Fargo, resulting in borrower compensation of $335 million and $175 million, respectively. The Dodd-Frank Act amended the Truth in Lending Act to limit substantially paying loan originators based on the loan terms, which appears likely to curtail discretionary pricing in the mortgage market.(13)
On March 13 2013 the CFPB made its first public statement that it would address discretionary pricing policies and their potential impact on protected classes in the auto-lending market.(14) The bulletin asserts CFPB authority over banks and finance companies that provide indirect auto lending, relying on language in the Equal Credit Opportunity Act and commentary to Regulation B that includes within the definition of 'creditor' an assignee that participates in the decision of whether to extend credit, including an assignee or purchaser of the obligation that participates by indicating whether it will purchase the obligation if the transaction is completed.(15) The CFPB also states that it considers the typical practice of indirect auto lending to cause lenders to become creditors under the Equal Credit Opportunity Act and Regulation B, and includes two examples of practices that could cause the CFPB to deem an indirect auto lender a creditor under the Equal Credit Opportunity Act. A lender that evaluates an applicant's information, establishes a buy rate and communicates that buy rate to the dealer would "likely" be a creditor; while a lender that provides rate sheets to a dealer establishing buy rates and allows the dealer to mark up those buy rates "may" become a creditor when it purchases the contract.
The bulletin states that an indirect auto lender's mark-up and compensation policies may alone suffice to trigger liability under the Equal Credit Opportunity Act if the lender regularly participates in credit decisions; the CFPB will consider disparities both within a particular dealer's transactions and across a lender's portfolio to determine whether disparities on a prohibited basis exist. In addition, the bulletin states that an indirect auto lender may be liable for an auto dealer's overt discrimination against or disparate treatment of a protected class, if the lender knew or had reasonable notice of the dealer's discriminatory conduct.
The CFPB's recent issuance regarding the auto-lending area is a confirmation of prior indications of its interest in this area. Companies involved in auto lending may want to review their practices in this area, and should monitor developments as the CFPB continues to expand its supervisory, rulemaking and enforcement agenda.
For further information on this topic please contact James Huizinga, John K Van De Weert or David E Teitelbaum at Sidley Austin LLP by telephone (+1 202 736 8000), fax (+1 202 736 8711) or email (email@example.com, firstname.lastname@example.org or email@example.com).
(5) See 78 Fed Reg 11460 (February 15 2013). See also www.sidley.com/HUD-Publishes-Final-Rule-Implementing-an-Effects-Test-for-Proof-of-Discrimination-under-the-Fair-Housing-Act-02-19-2013/.
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