News & Events

The CFPB’s Take On Indirect Auto Lending

As further proof that the CFPB has Fair Lending as one of its top priorities, that agency has issued its CFPB Bulletin 2013-2 addressing compliance with the fair lending requirements of the Equal Credit Opportunity Act (ECOA) in the context of purchases of indirect contracts from automobile dealers. In particular, the CFPB addresses those banks and other regulated entities that purchase retail automobile contracts from dealers while allowing those dealers to increase a consumer’s interest rate above what the bank (or other lender) establishes as the “buy” rate, or interest rate at which the lender commits to purchase the contract. The additional interest or up-charge is either retained by the dealer or split with the lender on some basis. This additional compensation is sometimes referred to as a “reserve” or “participation” charge. Sound familiar? It used to be a common practice, but it is unclear today how many banks currently purchase retail automobile paper, or allow for such up-charge practices.

Obviously, there is a serious prospect that discretion on the part of a dealer, in a situation such as that described above, might determine which consumers get higher interest rates and how much higher those rates might be. If the practice of allowing dealer up-charges should result in pricing disparities that can be linked to the race, national origin, gender or some other prohibited basis under ECOA, then discrimination might result. The doctrines of both disparate treatment and disparate impact would apply.

In its Bulletin, the CFPB takes the position that a bank or other lender who reviews an application and commits to purchase an automobile contract at a “buy” rate is a creditor for purposes of liability under ECOA. While contrary arguments can be made, it is a waste of time trying to argue that point. If the practice exists at your bank, you need to assess the compliance risks involved.

The CFPB suggests taking the following steps:

  • Imposing controls on dealer markup and compensation policies, or otherwise revising dealer markup and compensation policies, and also monitoring and addressing the effects of those policies so as to address unexplained pricing disparities on a prohibited basis; or
  • Eliminating dealer discretion to mark-up buy rates and fairly compensating dealers using another mechanism, such as a flat fee per transaction.

The CFPB concludes its Bulletin by once again stressing the importance of a robust compliance management system when it comes to Fair Lending. That goes without saying.

This action by the CFPB further evidences that agency’s focus on protecting consumers. It also demonstrates that the CFPB will use the full range of powers it possesses to provide that protection. Although automobile dealers succeeded in getting a carve-out from regulation under the Dodd-Frank act, the CFPB has drafted banks and other regulated lenders into the regulatory enforcement process to police automobile dealer practices. That approach may well continue in the future.

In a little-known provision in the Dodd-Frank Act, the CFPB is authorized to take enforcement action against any regulated lender that facilitates some other unregulated person, business, etc. in violating any of the consumer protection laws and regulations that the CFPB enforces. For instance, that authority could be used against a bank that has a line of credit to a car dealer that handles its own financing of automobile sales without selling the contracts directly to the bank. That line of credit might be unsecured, or might be secured by the sales contracts the dealer holds. Although no mention of that is made in Bulletin 2013-2, everyone would be well advised to be alert to activities that your customers engage in which your bank may be facilitating through lending or other traditional bank services. The CFPB is probably not through flexing all of its Fair Lending muscle.