CFPB Issues Guidance on Indirect Auto Finance
On March 21, the CFPB issued Bulletin 2013-02, which provides guidance to bank and nonbank indirect auto lenders about compliance with federal fair lending requirements, and specifically addresses the practice by which auto dealers “mark up” the indirect lender’s risk-based buy rate and receive compensation based on the increased interest revenues. The CFPB explains that indirect auto lenders are creditors under ECOA and Regulation B if they regularly participate in making credit decisions. Based on information the Bureau has collected to date, it believes the “standard practices” of indirect auto lenders constitute participation in a credit decision.
The CFPB contends that by permitting dealer markup and compensating dealers on that basis, lenders may be liable under the legal theories of both disparate treatment and disparate impact when pricing disparities on a prohibited basis exist within their portfolios. As such, the CFPB urges indirect lenders to (i) impose controls on, or otherwise revise, dealer markup and compensation policies, and monitor the effects of those policies and address unexplained pricing disparities on prohibited bases; or (ii) eliminate dealer discretion to mark up buy rates and compensate dealers in some other way.
The guidance also identifies what the CFPB considers to be core aspects of a robust fair lending compliance program, including: (i) an up-to-date fair lending policy statement; (ii) regular fair lending training for all employees involved with any aspect of the institution’s credit transactions, as well as all officers and board members; (iii) ongoing monitoring for compliance with fair lending and other policies and procedures intended to reduce fair lending risk; (iv) review of lending policies for potential fair lending violations, including potential disparate impact; (v) depending on the size and complexity of the financial institution, regular analysis of loan data in all product areas for potential disparities on a prohibited basis in pricing, underwriting, or other aspects of the credit transaction; (vi) regular assessment of the marketing of loan products; and (vii) meaningful oversight of fair lending compliance by management and, where appropriate, the institution’s board.