Earlier today, the CFPB released its guidance bulletin with respect to automobile indirect finance fair lending issues. The bulletin’s intent is unmistakably clear from the accompanying press release’s tag line: “CONSUMER FINANCIAL PROTECTION BUREAU TO HOLD AUTO LENDERS ACCOUNTABLE FOR ILLEGAL DISCRIMINATORY MARKUP.” The bulletin is, in my view, a prelude to the fair lending enforcement actions that the CFPB intends to take against indirect auto finance companies later this year. We will be teaching a webinar focused on this very topic on April 16, which will feature an in-depth discussion of fair lending issues in the indirect auto finance industry. Here’s the link if you’re interested in registering.
There are several notable things about the bulletin that I thought I’d point out, that I think will be of special interest to the auto finance industry:
- The bulletin is explicitly directed toward both banks and non-banks. Even though non-bank auto finance companies (like manufacturer captives) are not subject to the CFPB’s examination authority (yet), they are subject to the Bureau’s enforcement authority, and so they should take this bulletin seriously.
- The bulletin confirms that the CFPB will be applying statistical analysis to look for disparate impact portfolio-wide, not just in the contracts originated by particular dealers. This aggregation of dealer originations, in my view, creates the real possibility that the CFPB will find “discrimination” to exist, even if no dealer engaged in any discriminatory conduct. My recent blog post on this issue discusses this in more detail.
- The bulletin does not address the issue of what proxies the CFPB will use, or that it suggests financial institutions to use, in conducting statistical analyses of automobile portfolios. Nor does the CFPB offer any guidance on which variables should be part of the analysis – an issue that can make a very large difference in the outcome of the analysis. I wish the CFPB had been more detailed in its guidance on these issues, instead of simply recommending statistical analyses without addressing these critical details.
- The bulletin stops short of mandating the eliminating of dealer rate participation, offering alternatives such as communicating with dealers about ECOA issues; monitoring dealer conduct; taking action against dealers who appear to be engaging in discrimination; and conducting analyses of origination data. My own view is that the CFPB would prefer the elimination of dealer rate participation altogether, but it will be interesting to see if the Bureau regards these alternative measures as sufficient to save an indirect auto finance program from a fair lending enforcement action.
- Finally, the bulletin seems to assume, without explanation, that the existence of a disparate impact is enough by itself to be a violation of ECOA, foreclosing the finance company’s ability to argue that dealer rate participation serves a legitimate business interest and the government’s obligation to prove that the same interest can be served by a less-impactful alternative. Even if one accepts that the disparate impact theory is available under ECOA (which is highly questionable), the traditional analysis has three parts; the CFPB’s analysis seems to recognize only the first of those parts.
Overall, the bulletin is not surprising – it serves to confirm what we already knew regarding the CFPB’s view of dealer rate participation in indirect auto finance. And it reinforces, in my mind, the very high likelihood that we will see enforcement actions on this issue in the relatively near future, with the bulletin forming the blueprint for the legal arguments that the Bureau will make in those actions. Stay tuned.