CFPB, FRB, and DOJ Webinar on Fair Lending in Indirect Auto Finance

FRB CFPB Auto Finance Fair Lending DOJ

On August 6, 2013, the Federal Reserve sponsored a webinar entitled “Indirect Auto Lending – Fair Lending Considerations,” in which presentations were given by Patrice Ficklin, Fair Lending Director, Consumer Financial Protection Bureau (CFPB), Maureen Yap, Special Counsel/Manager, Fair Lending Enforcement, Federal Reserve Board (FRB), and Coty Montag, Deputy Chief, Housing and Civil Enforcement Section, Civil Rights Division, U.S. Department of Justice (DOJ). During the webinar, each of the speakers provided a perspective on the examination and enforcement activities of their respective organization, followed by a Question and Answer session.

Ms. Ficklin began by providing a summary of the CFPB’s supervisory and enforcement authority, followed by a discussion of CFPB Bulletin 2013-02. In discussing the bulletin, Ms. Ficklin addressed the specific guidance provided in that Bulletin, with a particular emphasis on how the “standard practices” of indirect auto financial institutions “likely constitute participation in a credit decision” resulting in their being deemed “creditors” under the ECOA. That was followed by a discussion of the way in which the existence of dealer discretion and markup presents fair lending risk and ways in which financial institutions may comply with fair lending requirement.  Ms. Yap then presented the FRB’s authority for and purpose in examining for fair lending risk in indirect auto finance, making particular note of the FRB’s referral of the Nara Bank case to the DOJ. Ms. Yap emphasized that FRB personnel rely on the 2009 Interagency Fair Lending Examination Procedures in determining the scope of an examination, including indirect auto financing practices, including as it relates to pricing which presents the “area of highest risk”. After discussing some of the FRB’s key risk factors, Ms. Yap then discussed methods used by the FRB to code loans and test for disparities. Ms. Yap also provided additional resources that may be of value to indirect auto financial institutions, including the FRB’s “Step-by-Step Guide to Coding for Gender and Ethnicity,” “Example:   Hypothetical Loan Data with Lookups and Formulas,” and “Female and Hispanic Names List (U.S. Census).” The last two items may be found here. Ms. Yap concluded her remarks by discussing what to expect if the FRB finds evidence of pricing disparities, and ways that market participants may mitigate their fair lending risk.

Ms. Montag opened her remarks with a review of ECOA’s framework and the DOJ’s recent enforcement activities in indirect auto finance, with particular attention given to both the 2009 partial Consent Decree and the recent “Agreed Order” with Union Auto and the default judgment against the final defendant. The Pacifico Ford, Inc. and Springfield Ford, Inc. cases were also discussed at some length, emphasizing the consent orders that limited the amount of dealer reserve in each matter and the circumstances under which the amount of such reserve may be modified. Finally, Ms. Montag provided an overview of ongoing enforcement efforts in the indirect auto market, with particular focus on (i) potential race-based targeting by “buy here, pay here” dealers; and (ii) discretionary dealer markups and fees, including “several” ongoing joint investigations with the CFPB.

The presentations were followed by a Question & Answer session in which the panelists addressed particular requests submitted by attendees.  Of particular interest were the following:

• To the extent exceptions are made to match competitive offers or otherwise, Ms. Yap suggested that all such instances should be “well documented” and include specific information that is maintained by the institution to help explain potential disparities as the need arises;

• Ms. Ficklin stated that in general, when determining fair lending violations, the CFPB relies on statistical evidence at “the 95^th per cent confidence level, or greater,” though she noted that the CFPB may look at data of a lower confidence level when providing supervisory guidance regarding potential fair lending risk or when acting in its supervisory capacity;

• In discussing whether a dealer agreement should address the obligation of the dealer to ensure the accuracy of data submitted in an auto finance transaction, Ms. Yap opined that it is important to address this issue and any other fair lending risks within such an agreement.  Ms. Yap suggested that dealer agreements should be explicit about fair lending expectations and learning about and resolving complaints to help mitigate fair lending risk;

• In discussing controlling for variables in analyzing whether disparities may be explained through permissible criteria, Ms. Yap acknowledged the FRB wants to look at “the variables that the bank actually uses”; but they nonetheless want to make clear distinctions between the “buy price” and any markup.   The “buy price” would take into consideration characteristics related to a borrower’s credit, such as credit score or income; but since markup is not usually based on such characteristics, they might take into consideration factors such as new car financing offers, or the month in which a purchase is made (based on any sensitivities related to purchases made in certain seasons); and

• In response to whether the CFPB’s approach to indirect auto exams is the same as that of the FRB, Ms. Ficklin stated that the evaluation of whether an indirect auto lender is in compliance with the ECOA requires “multiple steps.” She advised that a typical CFPB examination would include: a review of credit denials, interest rates quoted by the lender to the dealer (“buy rates”), and any discretionary markup of the buy rate by the dealer. Ms. Ficklin further stated that determining whether discrimination has occurred is both case-specific and fact-intensive and like the FRB, the CFPB’s analysis “considers appropriate analytical controls” in reviewing data to determine if a specific policy results in unlawful differences, on a prohibited basis. Ms. Ficklin then added that “consistent with the approaches of other federal regulators” including the FRB, the Bureau has previously indicated that it uses surnames, and geographic location data “to estimate protected characteristics” where direct evidence of protected characteristics is unavailable. She explained that the CFPB conducts its proxy analysis by using publicly available data from the Social Security Administration, and the Census Bureau, and that the CFPB is aware that some lenders are currently using various forms of proxy analysis for their own internal fair lending analyses. Finally, she noted that Bulletin 2013-02 encourages lenders who are not doing such analysis to select “a reasonable proxy method that is suitable for their nature, size and complexity” and to monitor their data for “fair lending risk.”

Though the webinar may not have covered a significant amount of new ground, it nonetheless provides some additional clarity around the expectations of the CFPB, FRB and DOJ when looking into fair lending matters in the indirect auto finance market as it relates to pricing and some useful resources from the FRB.  As such, institutions participating in the indirect auto finance market may be well served to listen to the archived copy of this presentation.