Indirect Lending and the CFPB

Earlier this week the Consumer Financial Protection Bureau (CFPB) issued guidelines for how indirect auto lenders can avoid violating the Equal Credit Opportunity Act (ECOA). In recent months, the CFPB focused on auto lenders potential violations of the ECOA.

The ECOA prohibits lenders from discriminating against borrowers based on specific protected classes which include race, color, religion, national origin, sex, marital status or age. Allegations of violations of ECOA arise when similarly situated consumers are provided different credit opportunities, and an allegation is made that the different credit opportunity arose because of a consumer’s protected class status.  While other factors may contribute to the difference in credit offered, the financial institution bears the burden of proof of establishing that the different credit was based on factors other than race, color, religion, national original, sex, marital status or age. 

Indirect auto lending occurs when a consumer seeks financing directly at the car dealership.  The car dealer uses information about the consumer and applies for financing with various financial institutions.  The financial institution then evaluates the consumer and either agrees to provide financing or passes on offering financing.  Some financial institutions give parameters to the car dealer, such as that they will buy the loan at a set interest rate, but the dealer may charge additional interest or a reserve, which they will keep as a profit.   

The CFPB is primarily concerned with situations where the dealer charges additional interest or a reserve.  The concern is that members of protected classes may be charged higher rates for their loans, which may violate ECOA. 

While some indirect lenders may claim that they are not liable under the ECOA because they are not originating the credit or directly accepting the application, the CFPB indicated that they would still be liable if they make a credit decision (such as offering a rate or agreeing to buy a loan at a set rate) or if they know that the car dealer is violating the ECOA.           

Although the CFPB has been focusing on indirect auto lenders for ECOA violations, they offered tips for indirect auto lenders which include:

• Imposing controls on dealer markup, or otherwise revising dealer markup policies;
• Monitoring and addressing the effects of markup policies as part of a robust fair lending compliance program; and
• Eliminating dealer discretion to markup buy rates, and fairly compensating dealers using a different mechanism that does not result in discrimination, such as flat fees per transaction.  (See CFPB Bulletin March 21, 2013). 

Indirect auto lenders are facing stricter scrutiny under the CFPB.  They should develop or revise their programs to ensure that the dealers they work with are not engaging in discriminatory practices.  Because an indirect auto lender may be using multiple lenders across the country, liability can be established based on discriminatory practices at one dealership or multiple dealerships.