- Recent CFPB Auto Finance Fair Lending Guidance
- October 17, 2014 | Author: Christopher R. Rahl
- Law Firm: Gordon Feinblatt LLC - Baltimore Office
The CFPB recently released their Summer 2014 issue of “Supervisory Highlights.” The publication addresses the CFPB’s fair lending supervisory activity in connection with indirect auto financing. It also provides insight into the CFPB’s views concerning acceptable methods for lenders to mitigate fair lending risks related to auto dealer discretion in the rate setting process.
The publication noted that the CFPB has been continuing to examine indirect auto lenders for Equal Credit Opportunity Act compliance. In addition to several large enforcement actions and settlements that the CFPB previously announced, the CFPB indicated that its examinations had revealed other instances of perceived pricing disparities among protected classes (related to discretionary auto dealer rate adjustments). The CFPB indicated that it had non-publicly “resolved” several matters with the related lenders through lender agreements to refund approximately $56 million to allegedly harmed borrowers.
The publication also provides insight into the CFPB’s views of how auto finance lenders should mitigate fair lending risks. The CFPB advised that auto finance lenders need to do the following: (1) implement a strong compliance management system that includes among other things: a fair lending policy statement, regular fair lending employee training, ongoing monitoring for fair lending compliance, and (depending on lender size/complexity) regular statistical analysis of loan data for potential disparities; (2) impose limits on dealer discretionary pricing adjustments (the CFPB indicated that a limit of 100 basis points may reduce fair lending risk and “significantly reduce” the need for certain compliance management activities); or (3) eliminate discretionary dealer adjustments and use a compensation method that does not result in discrimination (e.g., flat fee).
The CFPB’s preference is the third alternative (eliminate dealer discretion in rate setting), but the second alternative is interesting. The CFPB’s position is that if the amount of rate setting discretion is limited to no more than 100 basis points, it will significantly reduce portfolio-level disparities (basically, rate disparities will become statistically insignificant in the CFPB’s eyes). Following the second alternative won’t eliminate the need for a compliance management system, but could justify a much lighter compliance management system.
Indirect auto lenders that allow dealer markups need to heed the CFPB’s warnings and make adjustments to their compensation structures and compliance processes as soon as possible.