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CFPB, DOJ Announce First Joint Fair Lending Action Against Indirect Auto Finance Company
This morning, the CFPB and the DOJ announced their first ever joint fair lending enforcement action to resolve allegations that an auto finance company’s dealer compensation policy, which allowed for auto dealer discretion in pricing, resulted in a disparate impact on certain minority borrowers. The $98 million settlement is the DOJ’s third largest fair lending action ever and the largest ever auto finance action.
Investigation and Claims
As part of the CFPB’s ongoing targeted examinations of auto finance companies’ ECOA compliance, the CFPB conducted an examination of this auto finance company in the fall of 2012. This finance company is one of the largest indirect automobile finance companies in the country which, according to the CFPB and DOJ’s estimates, purchased over 2.1 million non-subvented retail installment contracts from approximately 12,000 dealers between April 1, 2011 and present. The CFPB’s investigation of the finance company allegedly revealed pricing disparities in the finance company’s portfolio with regard to auto loans made by dealers to African-American, Hispanic, and Asian and Pacific Islander borrowers. The CFPB referred the matter to the DOJ just last month, and the DOJ’s own investigation resulted in findings that mirrored the CFPB’s.
Specifically, the federal authorities claim that, based on statistical analysis of the loan portfolios, using controversial proxy methodologies, the investigations showed that African-American borrowers were charged on average approximately 29 basis points more in dealer markup than similarly situated non-Hispanic whites for non-subvented retail installment contracts, while Hispanic borrowers and Asian/Pacific Islander borrowers were charged on average approximately 20 and 22 basis points more, respectively. The complaint also faults the finance company for not appropriately monitoring pricing disparities or providing fair lending training to dealers.
The CFPB and the DOJ did not claim that the finance company intentionally discriminated against any borrowers. Instead the federal agencies alleged that the finance company’s facially neutral pricing policy allowed auto dealers to price in such a manner that resulted in certain minority groups, on average, paying more for credit than non-Hispanic white borrowers. The federal authorities employed disparate impact theory of discrimination, which allows government and private plaintiffs to establish “discrimination” based solely on the results of a neutral policy without having to show any intent to discriminate (or even in the demonstrated absence of intent to discriminate). When announcing the settlement, CFPB Director Cordray stated that “[w]hether or not [the finance company] consciously intended to discriminate makes no practical difference. In fact, we do not allege that [the finance company] did so. Yet the outcome, and the harm to consumers, is the very same here.”
Resolution
The investigation and potential enforcement action were disclosed by the finance company earlier this year. The final terms, formalized in a CFPB administrative consent order and a DOJ consent order filed in the U.S. District Court for the Eastern District of Michigan, require the finance company to pay an $18 million penalty and provide $80 million for a settlement fund to compensate borrowers allegedly harmed between April 2011 and December 2013. The CFPB and the DOJ will identify borrowers to be compensated and the amount to be paid to each identified borrower using an undisclosed methodology, and the payments will be administered by a third party administrator paid for by the finance company.
In addition, the finance company is required to adopt and implement a compliance plan pursuant to which the finance company must: (i) establish a dealer compensation policy that limits the maximum spread between the buy rate and the contract rate to no more than the spread currently permitted; (ii) provide regular notices to dealers explaining ECOA and dealer pricing obligations; (iii) establish quarterly and annual portfolio-wide analysis of markups based on the CFPB and the DOJ statistical methodologies; (iv) take prompt corrective action with respect to dealers identified in such quarterly analysis that culminates in prohibiting a dealer’s ability to mark up the rate or termination of the dealer relationship; and, (v) providing remuneration for affected customers.
While the settlements do not bar discretionary dealer compensation, they provide an incentive for the finance company to eliminate the practice. The agreements permit the finance company to develop a non-discretionary compensation plan for approval by the CFPB and the DOJ, subsequent to which the finance company no longer is required to implement the majority of the compliance plan.
Looking Ahead
Dealer compensation practices have been targeted by the CFPB for the past year, including in guidance issued earlier this year, which the CFPB recently defended at a public forum. We expect the CFPB’s scrutiny of dealer compensation and auto finance companies more generally to continue into next year. Questions regarding the matters discussed in this alert may be directed to any of the lawyers in our Auto Finance or CFPB practices, or to any other BuckleySandler attorney with whom you have consulted in the past.
Pennsylvania Updates Auto Finance Statutes
On November 27, Pennsylvania enacted HB 1128, which updates and consolidates the state’s Motor Vehicle Sales Finance Act (MVSFA) and Goods and Services Installment Sales Act (GSISA), and includes numerous changes relevant to auto finance companies. Among other things, the bill amends the MVSFA with regard to installment sales contracts, to, among other things: (i) require installment sale contracts to include a statement informing the buyer of possible additional rights under the state Unfair Trade Practices and Consumer Protection Law; (ii) add triggers allowing for an acceleration clause; (iii) require a holder to notify a buyer upon payment in full by specifying the obligation has been paid in full on the instruments which are to be returned to that buyer with delivery in 10 days of the tender date; and (iv) prohibit a buyer from waiving any provisions in the chapter, including any purported waiver affected by a contractual choice of the law of another jurisdiction contained in an installment sale contract. Other MVSFA amendments provide that only costs disclosed at the time of the installment sale can be included in the contract and specifically prohibit costs for repairs that arise after contract execution from being added to the original contract. The bill amends the GSISA to, among other things: (i) add new requirements related to repossession; (ii) specify new standards for closed-end and open-end credit agreements; and (iii) increase certain maximum allowable fees and finance charges. The changes take effect November 27, 2014.
Proposed California Ballot Initiative Targets Dealer Markups
Recently, the consumer advocacy group Consumers for Auto Reliability and Safety announced that it submitted a new ballot initiative in California that would, among numerous other things, prohibit dealer markups in auto finance transactions. The text as proposed would prohibit, in connection with the assignment of a conditional sale contract for a motor vehicle, any seller or employee of a seller from accepting, and any purchaser of a conditional sale contract from paying to any person or entity, compensation of any kind for arranging, assigning, or otherwise transferring a loan that varies based on the interest rate or other finance charges, or varies based on any other factor related to such interest rate or finance charges. The prohibition would not apply to, among other things, (i) an assignment that is with full recourse or under other terms requiring the seller to bear the entire risk of financial performance of the buyer or (ii) an assignment that is more than six months following the date of the conditional sale contract. The proposal is in the early stages of California’s ballot initiative qualification process.
Report On CFPB's Auto Finance Forum
This morning, the CFPB hosted an auto finance forum, which featured remarks from CFPB staff and other federal regulators, consumer advocates, and industry representatives.
Some of the highlights include:
- Patrice Ficklin (CFPB) confirmed that the CFPB, both before issuing the March bulletin and since, has conducted analysis of numerous finance companies’ activities and found statistically significant disparities disfavoring protected classes. She stated that there were “numerous” companies whose data showed statistically significant pricing disparities of 10 basis points or more and “several” finance companies with disparities of over 20 or 30 basis points.
- Much of the discussion focused on potential alternatives to the current dealer markup system. The DOJ discussed allowing discretion within limitations and with documentation of the reasons for exercising that discretion (e.g., competition). The CFPB focus was exclusively on non-discretionary “alternative compensation mechanisms”, specifically flat fees per loan, compensation based on a percentage of the amount financed, or some variation of those. The CFPB said it invited finance companies to suggest other non-discretionary alternatives. Regardless of specific compensation model, Ms. Ficklin stated that in general, nondiscretionary alternatives can (i) be revenue neutral for dealers, (ii) reduce fair lending risk, (iii) be less costly than compliance management systems enhancements, and (iv) limit friction between dealers on the one hand and the CFPB on the other.
- There was significant debate over whether flat fee arrangements, or other potential compensation mechanisms, actually eliminate or reduce the potential for disparate impact in auto lending. There was also criticism of the CFPB’s failure to empirically test whether these “fixes” would result in other unintended consequences. Industry stakeholders asserted that such arrangements fail to mitigate fair lending risk market-wide while at the same time potentially increase the cost of credit and constrain credit availability. Industry stakeholders also questioned the validity of the large dollar figures of alleged consumer harm caused by dealer markups. When assessing any particular model, the CFPB’s Eric Reusch explained, finance companies should determine whether (i) it mitigates fair lending risk, (ii) creates any new risk or potential for additional harm, and (iii) it is economically sustainable, with sustainability viewed through the lens of consumers, finance companies, and dealers.
- Numerous stakeholders urged the CFPB to release more information about its proxy methodology and statistical analysis, citing the Bureau’s stated dedication to transparency and even referencing its Data Quality Act guidelines. The DOJ described its commitment to “kicking the tires” on its statistical analyses and allowing institutions to do the same. The CFPB referenced its recent public disclosure of its proxy methodology, noting that this was the methodology the CFPB intended to apply to all lending outside of mortgage.
- Steven Rosenbaum (DOJ) and Donna Murphy (OCC) pointedly went beyond the stated scope of the forum to highlight potential SCRA compliance risks associated with indirect auto lending.
Additional detail from each panel follows. Please note that these details are based on notes taken during the event and could differ from actual statements made during the event. The entire report is subject to alteration or clarification, particularly if a transcript or archived video are made available.
Opening Remarks
Director Cordray opened the forum. He stressed the importance of vehicles to individual consumers and to the broader economy. He stated that some consumers may be subject to discrimination that may result in millions of dollars in consumer harm each year.
As he did in a Senate hearing earlier this week, Mr. Cordray emphasized that neither the 2012 fair lending bulletin nor the March 2013 auto finance bulletin were new; they simply served as a reminder to finance companies of liability under ECOA, particularly with regard to indirect auto finance.
He stated that the CFPB uses proven statistical methods and publicly available data to assess the probability that a particular customer belongs to a particular racial group or is of a particular national origin.
The March bulletin provided guidance about steps auto finance companies might consider taking to ensure they are ECOA-compliant. One approach described by the Director is to develop robust fair lending compliance management systems to monitor for disparate impact and promptly remedy consumer harm on an ongoing basis when it is identified. The bulletin also stated that finance companies could take steps to comply with the law by adopting some other pricing mechanism that fairly compensates dealers for their work but avoids the fair lending risks that are inherent in pricing by discretionary markup. Director Cordray stated that such mechanisms include: a flat fee per transaction, or a fixed percentage of the amount financed, or other nondiscretionary approaches that market participants may devise that would work to address these concerns.
He acknowledged that dealers are entitled to fair compensation, but stressed that the CFPB wants to make sure the process is transparent. He stated it is worth considering further how the disclosure of markup practices actually works.
Panel 1
Patrice Ficklin (CFPB): Ms. Ficklin described and defended the March bulletin, asserting that the CFPB did not provide any new legal interpretations, but rather reminded finance companies about existing law. She noted and defended the CFPB’s proxy methodology, as described recently in letters to Congress, but did not provide additional detail. She stated that the CFPB’s supervisory and enforcement work in this area is more substantial than it was in March, and continues to indicate fair lending risk—the CFPB has found “substantial and statistically significant” disparities between African Americans, Hispanics, and Asians and similarly situated white borrowers. The CFPB has identified numerous institutions with disparities over 10 basis points, and several over 20 or 30 basis points.
Going forward, the CFPB is committed to continuing a constructive dialogue with industry, a dialogue in which alternative compensation structures has been the key theme to date.
Melissa Yap (FRB): Ms. Yap described the Fed’s ECOA authority post-Dodd-Frank. She stated that pricing remains the greatest area of risk. The Fed employs the 2009 interagency fair lending procedures and looks at (i) financial incentives, (ii) the amount of discretion, and (iii) disparities in note rate and markup over buy rate. She described the Fed’s proxy methodology, which differs slightly from the CFPB’s, but which the Fed believes is appropriate for the size and complexity of the institutions it supervises. For race, the Fed geocodes and defines majority-minority census tracts as those over 50%. She defended name proxies for gender and ethnicity, stating they are as likely to over count as under count. She also referenced two webinars the Fed and other hosted this year, which included discussion of these issues, see e.g., August webinar.
Steven Rosenbaum (DOJ): Mr. Rosenbaum described the DOJ’s broad authority to enforce ECOA and noted that it has a number of investigations ongoing, including joint investigations with the CFPB. He stated that Congress created the issue that requires the use of proxies, given that ECOA protects classes in consumer lending but does not require data collection similar to HMDA. The DOJ is using the CFPB’s method on joint investigations, but it continues to “kick the tires” on its methods and analyses and invites finance companies to do the same.
He stated, twice, that ECOA does not require nor prohibit discretion in pricing; risk from discretion can be managed, for example by setting caps or requiring justifications and documentation.
Mr. Rosenbaum added that the DOJ also enforces SCRA, and stated that if finance companies have not thought about SCRA compliance in their auto finance programs, they ought to do so. He also acknowledged the DOJ’s ongoing investigation of buy-here, pay-here dealers, though the issues differ in that those dealers may be offering predatory products in minority neighborhoods.
Keith Ernst (FDIC): Mr. Ernst similarly described the FDIC’s jurisdiction and addressed in broad terms its approach to indirect auto financing. He stated that all examination and statistical results that are consistent with a violation are subject to independent review and all statistical analyses are reviewed by a team. The FDIC provides institutions with the results, data, and methods and provides an opportunity for questions and other feedback. Mr. Ernst also noted that this dialogue includes providing institutions with the opportunity to provide non-discriminatory explanations for statistical disparities. According to Mr. Ernst, the FDIC has amended analyses as part of these processes. The FDIC believes the vast majority of its banks are effectively managing fair lending risk in auto finance, but that examinations can reveal compliance management systems concerns that fall short of a fair lending violation.
Tonya Sweat (NCUA): Ms. Sweat stated that the practices identified in the CFPB bulletin are not prevalent in the credit union industry, but NCUA still examines for fair lending risk and safety and soundness. The NCUA advises credit unions that sound practices include sampling and testing of loans, particularly to ensure third-party compliance. Credit unions should implement written policies that require written approval of any changes to underwriting criteria.
Donna Murphy (OCC): Ms. Murphy provided only brief comments, and generally referenced and incorporated what others had said on proxies. The OCC is revising and updating its methods for fair lending risk assessments and scoping based on changes in markets, the legal environment, and technology. These changes are intended to result in more consistency in examinations and the ability of the OCC to conduct more analysis across banks. For auto finance, the OCC is looking at how it gathers factors regarding use of third-parties. Ms. Murphy also noted the OCC’s attention to SCRA, stating that last year it revised examination procedures and enhanced examiner training for SCRA, including in auto finance, and that those enhancements are reflected in this year’s examination cycle.
Panel 2
The second panel was moderated by the CFPB’s Rohit Chopra and featured remarks from the National Association of Minority Automobile Dealers (NAMAD), the National Consumer Law Center (NCLC), the Consumer for Auto Reliability and Safety (CARS), and the NAACP.
Stuart Rossman from the NCLC described his part in a series of class actions against auto finance companies in the 2000s. Those actions, as he described, resulted in markup caps, the last of which sunsetted last year. He asserted that the market forces that led to those actions persist, as do fundamental problems in discretionary pricing policies. Citing more restrictive class action requirements and less access to critical data, he called on the CFPB to take the lead in enforcement.
NAMAD acknowledged the possibility that bad actors exist in the market, but argued against eliminating discretion. NAMAD called for approval and documentation requirements for discretionary programs. NAMAD supports uniform data collection, enhanced proxies, training and education for dealers and consumers.
CARS noted California’s markup cap statute and reported that a proposal for a ballot proposition outlawing dealer discretion has been filed with the state attorney general. CARS also encouraged the CFPB to look at the impact of percentage rate markups in the motor home market.
Panel 3
Bill Himpler, American Financial Services Association (AFSA): Mr. Himpler stressed that the current indirect auto finance model is efficient and proven. He noted that auto finance complaints are at record lows, and pointed out that even the CFPB’s database shows a small number of complaints compared to other markets. Since the CFPB has refused to assess the impact of a broad market shift towards flat fee compensation structures or other alternatives, AFSA is commissioning an independent study to assess the present model and evaluate costs and benefits of alternative models.
Chris Kukla, Center for Responsible Lending (CRL): Mr. Kukla countered that the current compensation model gives rise to potential discrimination and should be ended. Consumers have no ability to know what part of their rate is based on risk and what is due to compensation. He defended the CRL’s 2011 study on indirect auto finance from attacks, including those that followed Senator Warren’s reference to the study during a Senate hearing earlier this week. That study concluded that consumers pay $26 billion each year in markups. Mr. Kukla explained that CRL never said consumers would not otherwise be charged a portion of those fees, and only sought to define the size of the market. He referenced other research that indicates a market-wide adoption of flat fee arrangements would have little impact on dealers.
Paul Metrey, National Automobile Dealers Association (NADA): Mr. Metrey outlined a preferred approach by federal regulators to unintentional disparate impact discrimination: (i) understand the market, (ii) develop appropriate methods, and (iii) if present, address in a manner that assists consumers. He called for the CFPB to pursue more open processes on this issue, including by identifying its complete statistical methodology and fully accounting for neutral legitimate factors. He presented NADA’s case against flat fee arrangements, in part on the basis that dealers still will have discretion to select among finance sources that may offer different flat fee arrangements.
Rich Riese, American Bankers Association (ABA): Mr. Riese challenged the CFPB’s post hoc approach to obtaining input on its auto finance program, stating that the forum does not substitute for the kind of engagement the issue requires. He argued that the guidance should have been proposed and subject to notice and comment. The ABA believes proxies should be viewed with skepticism; they can be useful to identify risks and can be useful in compliance programs, but they should not be used to prove violations. Citing the 1999 interagency exam procedures, he argued that discretion is not an appropriate area to apply disparate impact, and, before straying too much from prior policy, regulators should recognize that Reg. B applies to creditors determination of creditworthiness and the discretion being applied in auto finance is for compensation and is not part of a creditor’s determination of creditworthiness.
The panelists also discussed the comparison of indirect auto finance to the mortgage market, particularly the use of broker yield spread premiums. Mr. Riese pointed out that in the mortgage context, brokers were alleged to have steered borrowers into “bad” loans without considering suitability; that is not the case in the auto market where there are no option arms, teaser rates, etc. Mr. Himpler and Mr. Metrey agreed. Mr. Metrey added that the comparison is apples to oranges—the markets have performed differently; there is nothing going on in auto ABS like there was in MBS. He added that Congress directed an end to yield spread premiums and there has been no similar action in auto, and the Fed tested to see if a fix was necessary but there has been no similar testing in auto.
Mr. Kukla responded that the mechanics may be different, but the impact and incentives are the same. A broader view of “steering” covers any instance in which a consumer is provided a loan with less advantageous terms than the consumer otherwise would have received.
Senators Challenge CFPB On Indirect Auto Finance Guidance
On October 30, a bipartisan group of 22 Senators sent a letter to the CFPB raising concerns about CFPB guidance affecting the indirect auto financing market and auto dealers’ ability to negotiate retail margins with consumers. The guidance at issue, contained within CFPB Bulletin 2013-02, advised bank and nonbank indirect auto financial institutions about compliance with federal fair lending requirements in connection with the practice by which auto dealers “mark up” the financial institution’s risk-based buy rate and receive compensation based on the increased interest revenues.
In August, the CFPB responded to a similar inquiry from House members. The Senate letter asserts that the CFPB still has not explained a basis for alleging that discrimination under a “disparate impact” theory of liability exists in the indirect auto financing market. Nor, the letter continues, has the CFPB released the statistical methodology it uses to evaluate disparate impact in an indirect auto lender’s portfolio.
The Senators request details concerning the CFPB’s statistical methodology and also seek information about: (i) coordination among the CFPB, Federal Reserve Board, and FTC regarding the CFPB’s fair lending guidance to financial institutions; (ii) the decision to issue the guidance via a bulletin without public comment rather than employing the Administrative Procedures Act rulemaking process; and (iii) any cost-benefit analysis conducted into the affect that industry adoption of a flat-fee dealer compensation mechanism would have on the cost for consumers across the credit spectrum.
The letter comes on the heels of a related inquiry to the FTC last week, which urged the FTC to investigate, among other things, auto dealer practices regarding interest rate markups and requested information on the FTC’s auto dealer markup enforcement activity.
DOJ Announces Settlement of Auto Lending Discrimination Suit
On September 6, the DOJ announced the resolution of a long-running lawsuit against an auto dealer and a bank that financed many of the dealer’s loans, in which the government alleged that the dealer and the bank violated ECOA by charging non-Asian customers higher interest rate markups than other customers over a three-year period. The bank entered into a partial consent decree in 2009 and agreed to pay a total of $410,000 to non-Asian borrowers to resolve the allegations against it. The dealer chose to litigate and obtained a dismissal in trial court; that order was reversed last year by the Ninth Circuit. The dealer agreed to a consent decree with the DOJ on September 4 that fully resolved all claims against it. The dealer, which is now out of business, specifically denied the government’s allegations and the decree made clear the outcome was a “compromise of disputed allegations.” Under the terms of the decree, the dealer will pay up to a total of $125,000 to non-Asian customers who were charged higher dealer interest rate markups. If the dealer or its principal shareholder re-enter the business of automobile lending within the two year duration of the consent decree, it will be required to implement clear guidelines for setting dealer markup and pricing, in compliance with ECOA, and establish fair lending training for its employees and officers.
Illinois Enacts Auto Ancillary Products Bill
On August 9, Illinois enacted HB 1460, which expands the definition of “service contract” in the state’s Insurance Code to include ancillary auto service contracts – e.g. contracts related to the repair or replacement of tires, repair of certain damage to motor vehicles, or that provide for protective systems applied to a vehicle. By expanding the definition, the new law requires any provider of such ancillary products operating in Illinois to register with the Illinois Department of Insurance, pay an annual registration fee, and to designate an individual for service of process. Ancillary auto product providers also will be subject to, among other things, financial requirements, disclosure rules, and record keeping requirements, and will be subject to examination and enforcement by the Illinois Department of Insurance. The changes take effect on January 1, 2014.
CFPB Responds to Inquiry by Members of Congress on Indirect Auto Lending Guidance
On August 2, the CFPB responded to a letter submitted by 35 republican members of Congress who are concerned about the fair lending guidance the CFPB issued to indirect auto lenders earlier this year. The bulletin, issued in March, confirmed the CFPB’s position that indirect auto finance companies are “creditors” subject to the fair lending requirements of ECOA and Regulation B and specifically addressed the risk of discrimination allegedly caused by discretionary dealer participation and compensation policies, concluding that indirect auto finance companies 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. The members criticized the CFPB’s lack of transparency and accountability in issuing the guidance “without a public hearing, without public comment, and without releasing the data, methodology, or analysis it relied upon to support such an important change in policy” and requested that the CFPB provide full details of the statistical disparate impact methodology used to support the bulletin’s directives.
The CFPB’s response letter affirms its indirect auto lending guidance, stating that the Bureau perceives frequent lack of fair lending compliance programs associated with this type of consumer lending despite Bureau’s assertion that ECOA applies to all credit transactions. The CFPB further asserts that the notice-and-comment rulemaking process was not necessary for the bulletin, because the Administrative Procedure Act — which sets out the basic principles that apply to regulatory activity by federal agencies — does not require notice and comment for “general statements of policy, non-binding information guidelines, or interpretive memoranda.” The letter also explains that because data about race, ethnicity, and gender is not typically collected in auto finance transactions, the CFPB employs a proxy methodology using surname and geographic location to identify potential pricing disparities affecting protected classes. In support of its approach, the CFPB asserts that use of proxies for unavailable data is generally accepted and maintains that disparities will be considered “in view of all other evidence,” including the finance companies’ own analysis. The CFPB emphasized that “each supervisory examination or enforcement investigation is based on the particular facts presented” and that the CFPB “typically look[s] to whether there is a statistically significant basis point disparity in dealer markups received by the prohibited basis group.” Lastly, the letter reiterates the CFPB’s ongoing coordination with other federal agencies to ensure that fair lending supervision and enforcement is “consistent, efficient, and effective.”
For additional information about federal authorities’ approach to fair lending in indirect auto finance, see our report on a recent Federal Reserve Board-sponsored webinar entitled “Indirect Auto Lending – Fair Lending Considerations,” in which presenters from the CFPB, FRB, and DOJ provided a perspective on the examination and enforcement activities of their respective organizations.
CFPB, FRB, and DOJ Webinar on Fair Lending in Indirect Auto Finance
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 95th 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.
CFPB, Federal Reserve Board, DOJ Plan Indirect Auto Fair Lending Compliance Event
On July 15, the Federal Reserve Board announced that it will co-host an upcoming consumer compliance webinar with the CFPB and the DOJ entitled “Indirect Auto Lending – Fair Lending Considerations.” The event, which will be held August 6, 2013, 11:30 a.m. – 12:30 p.m. (ET), will feature Maureen Yap, special counsel and manager of the Federal Reserve’s Fair Lending Enforcement Section; Coty Montag, deputy chief of the DOJ’s Housing and Civil Enforcement Section of the Civil Rights Division; and Patrice Ficklin, assistant director of the CFPB’s Office of Fair Lending and Equal Opportunity. The panelists plan to discuss (i) the CFPB’s indirect auto lending bulletin and compliance with ECOA; (ii) supervisory guidance; (iii) examination procedures; (iv) public settlements; and (v) “emerging issues.” Following their presentations, the panelists will take audience questions, which may be submitted in advance.