Compliance Update: Dealer markup and fair lending
Published Jun. 2015
Actions to consider to ensure your dealership is fairly lending
By Dan Bickmore, Chief Compliance Officer
The Equal Credit Opportunity Act (ECOA), and its implementing regulation — Reg. B — prohibit discrimination against a credit applicant on the basis of race, color, religion, national origin, sex, marital status and age because all of a part of the applicant's income derives from public assistance or because the applicant has in good faith exercised rights under the federal Consumer Credit Protection Act. Like nine innings in baseball, these are nine so-called "protected classes."
Federal regulatory enforcement agencies with fair lending responsibility, including the Federal Trade Commission and the Department of Justice (with enforcement authority over dealers) and the Consumer Financial Protection Bureau (CFPB) have taken the position that violations of ECOA can occur even with no intent to discriminate because of something known as "disparate impact" discrimination. Seemingly neutral acts or practices that have disproportionate negative impacts on a protected class can create a claim of illegal discrimination.
Few legal topics have received as much regulatory scrutiny and financial press ink over the past two or so years as the relationship between dealer markup and disparate impact discrimination. As recently as April 2015, the CFPB reaffirmed that its examination teams review indirect auto lenders for ECOA compliance with targeted ECOA exam reviews, including analysis of discretionary markup of the lender buy rate.
Of course as with any "wrong" that can take place without any intent to do wrong, it is almost impossible to detect or stop it when it is happening; certainly a lender has no idea that it is happening, since it is unfamiliar with the race or ethnicity of an applicant and a dealer is also likely unaware an alleged "wrong" is taking place by the simple act of adding to the buy rate to compensate for the costs of finance staff, offices and overhead. Therefore, a finding of disparate impact typically must be established after the fact by statistical evaluation of past credit transactions using a methodology that assigns a race or ethnicity to a consumer based on a consumer's address and surname. While the accuracy of such "proxy" analysis is subject to significant debate by attorneys and statistics wizards, federal regulators believe it is accurate enough to determine potential federal law violations.
As you could probably guess, in light of this regulatory approach, as long as dealers enjoy discretionary markup, GM Financial has no choice but to both perform this analysis at the portfolio and dealership level, and advise dealers when the numbers show unexplained disparities.
Regardless of the unanswered questions in this complicated area, there are a few things we know that can reduce the potential for discrimination claims of any variety — intentional or unintentional — being brought against a dealership or its finance partner like GM Financial.
Here is a quick, non-exhaustive list of things to consider to improve fair lending compliance:
- Document, publish and train all employees on a Fair Lending Policy.
- Create, post publically and train all employees on fair lending.
- Underscore your dealership's commitment to the principles of fair lending and compliance with laws. The message should be sent visibly by the Board of Directors and Senior Management to ensure it is a message sent and received.
- Supplement the policy with easy-to-understand procedures to guide individual employee behavior.
- Consult with your legal advisor on the details of the policies and procedures.
- Train all employees on the policy and program annually, and train dealer sales and finance employees even more frequently.
- Let your customers know you are fully committed to fair lending.
- Consider adopting the NADA Fair Credit Policy and Program to further your protection in this area.
- Underscore the importance of fair, non-discriminatory markup policies. Focus attention on the area of dealer markup by periodically highlighting through team meetings, huddles or other communications the importance of establishing markup in a fair, consistent and defensible manner without regard to an applicant's status or membership in any protected class.
- Note and review discretionary pricing decisions. Review your processes for assessing markup and, wherever discretion is exercised, make sure it is done in a non-discriminatory manner. Document the non-discriminatory business justification for every exercise of discretion.
- Review past transactions. Periodically review past credit files to make sure that you can defend your markup setting actions on each transaction is consistent with policy and made on an objective, verifiable basis. Leave no room for the allegation that discrimination might be involved.
- Independently investigate all complaints. Investigate and resolve all consumer complaints. Make sure the person investigating was not involved in the original decision if at all possible.
We all want our customers at the dealership to have the kind of buying and financing experiences that are rewarded by repeat business. Commitment to the principles and practices of Fair Lending ultimately help generate customer trust and loyalty.