Compliance Update: Fair Lending and Dealer Participation verdict awaiting an answer
Published Nov. 2015
In July, the Consumer Financial Protection Bureau (CFPB) celebrated its fourth anniversary. Throughout its short history, the organization has been focused on vehicle financing, especially on dealers' and lenders' interest rate-setting practices. However, ruling on those practices is a complicated issue, as even CFPB Director Richard Cordray acknowledged before the U.S. House Financial Services Committee in September, saying, “What we have found is, it is a somewhat more complex problem than maybe we thought it was.”
Let's backtrack: The ECOA
The CFPB evaluates interest rate setting practices, including dealer participation, under the requirements of the Equal Credit Opportunity Act (ECOA). The ECOA prohibits discrimination in the availability of credit on the basis of race, color, religion, national origin, sex, marital status, age, receipt of public assistance income, or the exercise of rights granted under the federal Consumer Credit Protection Act. The ECOA places restrictions on the information that can be obtained when evaluating and extending credit. It also requires that denied applicants be notified of adverse action taken on their applications.
Setting precedence with recent actions.
This year alone, the CFPB resolved two actions against purchasers of dealer-financed auto sale transactions (American Honda Finance and Fifth Third Bank), which provided for reduced dealer discretion to mark up interest rates to 1.25 above the buy rate for auto financings with terms of 5 years or less, and to 1 percent for auto financings with longer terms.
Director Cordray confirmed that the CFPB would like to see these recent consent orders serve as models for other lenders to follow. Whether that result will ever happen, and, even if it does, over what kind of time period, is impossible to guess at this point. The CFPB has no direct supervisory authority over dealers and there are serious legal impediments to universal market rate caps being imposed by the CFPB across the finance industry. Each auto finance company has internal strategies and goals that will dictate in large measure what each chooses to do from a competitive perspective outside legal requirements.
What does it mean for GM Financial?
As long as discretionary dealer markup exists and disparate impact discrimination is seen by regulators and courts as violating ECOA, auto financers like GM Financial will be required to perform statistical, proxy-based analyses on dealer participation. If that analysis shows unexplained disparities negatively impacting a legally protected class, then GM Financial will be required to contact the dealer and inquire regarding the dealer's mark-up practices overall and as applied to the particular contracts included in the period of statistical analysis.
How do I demonstrate legal compliance?
First and foremost you must understand that, under the current regulatory interpretation of ECOA by the CFPB and other federal regulators, discrimination based on disparate impact is against the law. This applies to both dealers and lenders. Dealers should adopt, post and train employees on policies and procedures designed to make sure that illegal discrimination – whether unintentional disparate impact or intentional disparate treatment – does not exist in auto financing transactions.
Second, and importantly, all dealers should adopt the NADA Fair Credit Compliance Policy and Program or similar documented program. Under the NADA program or any similar program, you should establish a pre-set standard participation rate for every transaction, and only deviate downward if an allowable good faith, pro-competitive, legally compliant and fully documented justification exists.
The NADA Fair Credit Compliance Policy and Program contains a number of other steps and practices that are critical for creating and maintaining a sound Fair Lending program, including
- Establish a dealer fair lending policy
- Formally adopt a dealer fair lending policy by your dealership leadership
- Create a dealer fair lending policy with a responsible program coordinator and appropriate training, oversight and reporting
You should, of course, consult with your own legal counsel before adopting any fair lending program or designing programs to comply with state and federal fair lending laws. Adopting the NADA Fair Credit Compliance Policy and Program or comparable program is one – if not the best – step you can take to document your participation practices for a finance company like GM Financial or any federal regulator.
It's good business and the right thing to do.