CFPB Issues Guidance on Indirect Lending and ECOA Compliance

A bulletin released by the Consumer Financial Protection Bureau (CFPB) on March 21 provided indirect auto lenders within the bureau’s jurisdiction with recommendations for limiting fair-lending risks under the Equal Credit Opportunity Act (ECOA) for discriminatory dealer markups.

When consumers purchase an automobile, they may receive financing from an auto dealership rather than directly from a financial institution, which is known as “indirect auto lending”. In this process, the dealer often facilitates indirect financing through a third-party lender such as a credit union. The credit union provides the dealer with an interest rate that it will accept for a given customer.

Indirect auto lenders often allow the dealer to charge the consumer an interest rate that is more costly for the consumer than the rate the lender originally authorized. The lender shares part of the revenue from that increased interest rate—typically referred to as the “dealer markup”—with the dealer.

The ECOA makes it illegal for a “creditor” to discriminate in any aspect of a credit transaction because of race, color, religion, national origin, sex, marital status, age, receipt of income from any public assistance program, or the exercise, in good faith, of a right under the Consumer Credit Protection Act. The definition of “creditor” in this case not only includes “any person who regularly extends, renews, or continues credit,” but also “any assignee of an original creditor who participates in the decision to extend, renew, or continue the credit.”

Lender policies that provide the dealer with wide discretion to charge different rates pose a significant risk in resulting in pricing disparities based on race, national origin, and other prohibited bases. When such disparities exist within an indirect lender’s portfolio, the lender may be liable under the legal doctrines of both disparate treatment and disparate impact.

The CFPB recommends that indirect auto lenders take at least the following steps to ensure they are operating in compliance with fair lending laws as applied to dealer markup and compensation policies. These steps may include, but are not limited to:

  • 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 even
  • Eliminating dealer discretion to mark up buy rates, and fairly compensating dealers using a different mechanism that does not result in discrimination, such as flat fees per transaction.

In addition, credit unions that wish to retain dealer markup compensation programs may wish to address the fair lending risks by:

  • Sending communications to all participating dealers explaining the ECOA, stating the lender’s expectations with respect to ECOA compliance, and articulating the dealer’s obligation to mark up interest rates in a non-discriminatory manner in instances where such markups are permitted;
  • Conducting regular analyses of both dealer-specific and portfolio-wide loan pricing data for potential disparities on a prohibited basis resulting from dealer markup and compensation policies;
  • Commencing prompt corrective action against dealers, including restricting or eliminating their use of dealer markup and compensation policies or excluding dealers from future transactions, when analysis identifies unexplained disparities on a prohibited basis; and
  • Promptly remunerating affected consumers when unexplained disparities on a prohibited basis are identified either within an individual dealer’s transactions or across the indirect lender’s portfolio.

Industry-Expert Steve Peterson to Lead NWCUA’s April Collection Seminars

As the CFPB works to protect consumers by increasing transparency and accountability during the lending process, the Northwest Credit Union Association (NWCUA) is hosting Steve Peterson, a collections expert with more than 35 years in the field, for two Collections Seminars in April.

During the interactive full-day seminar, Peterson will cover tips on handling bankruptcy in collections, skip tracing, and remaining current and compliant with applicable laws, including the Fair Debt Collection Practices Act. Among other benefits, you will enhance your negotiating skills and learn how to effectively monitor collectors by utilizing the best methods of telephone collections and latest internet-based strategies.

Scheduled for April 16 in Portland, Ore., and April 17 in Federal Way, Wash., the Collections Seminar will offer practical tools and insight for those just stepping into the field of collections as well as veterans looking to sharpen their tools, including:

  • New ways to monitor collections;
  • How collection laws affect your daily operations—what you can and cannot do;
  • 12 new tactics to boost your collections effectiveness;
  • How your negotiating skills can help you get better results in less time; and
  • The best methods of telephone and Internet-based collection strategies.

Peterson’s career began with Ford Motor Credit Company in 1977. Four years later, he accepted a position as the accounts receivable manager for a large Midwestern retail chain, and in 1988, Peterson joined Mapother & Mapother Attorneys as Law, where he was the lead account representative for 14 consecutive years. Peterson and Bill Mapother developed and operated a collection school together and have trained more than 10,000 employees since 1991.

In 2002, Peterson formed his own collection training company, Collection Training Consultants, and he now conducts on-site training events for companies and organizations across the nation, including for 27 different state credit union leagues and 15 state banking associations.

Register for the April 16 Collections Seminar in Portland.

Register for the April 17 Collections Seminar in Federal Way.

 

Questions? Contact the Compliance Hotline: 1.800.546.4465, compliance@nwcua.org.

Posted in Compliance.