Last month the Consumer Financial Protection Bureau announced that it will start holding banks accountable for the discriminatory actions of indirect auto lenders. The issue arises when a consumer goes to purchase a car and applies for financing right at the dealership. That dealer then takes the loan application and submits it to a bank which either declines the loan or offers to make the loan at a fixed rate. Pursuant to the dealer’s arrangement with the bank, it can then markup the loan in what is known in the industry as “dealer reserve.” Its not that different from a yield spread premium in the mortgage industry.
For years there has been litigation about whether banks can be held accountable for a dealer’s discriminatory markups. Some courts say yes. Some say no. The CFPB has now weighed in and as a result we can expect many more of these types of cases. The CFPB has found that giving discretion to dealers to markup loans creates a significant risk of price disparity based on race, national origin and potentially other prohibited bases.
The CFPB is encouraging institutions subject to CFPB jurisdiction to take steps to make sure they are in compliance with the Equal Credit Opportunity Act and Regulation B. The CFPB proposes that banks impose controls on dealer markup and compensation policies, monitor and address unexplained price disparities on or eliminate altogether dealer discretion to markup rates.
The CFPB also suggests financial institutions develop a fair lending program which includes:
- Up to date fair lending policies statements;
- Monitoring for compliance with fair lending policies and procedure;
- Review of lending policies for potential violations;
- Analysis of loan data for potential disparities;
- Regular assessments of the marketing of loans and;
- Meaningful oversight of fair lending compliance.
This program should also include the bank making sure to educate the dealers about the Equal Credit Opportunity Act, gathering dealer specific portfolio wide loan pricing data and taking corrective action against dealers who misuse the markup procedure and promptly refunding money to consumers who have unexplained disparities on their transactions.
The bulletin is not a regulation. Its contents are not mandates. But as we have heard before, the CFPB is the cop on the beat. This bulletin identified a new avenue for investigation. Banks have taken notice. Recent earnings calls already have revealed bank plans to cut back on dealer discretion.