On March 21, 2013, the CFPB issued CFPB Bulletin 2013-02: Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act. In this bulletin, the CFPB describes its understanding of how the indirect auto lending industry works, and describes its view on how ECOA applies to indirect auto lending—including its theory on lender liability for disparities in dealer markups. The guidance offers advice to bank and nonbank indirect auto lenders within the CFPB’s jurisdiction on how they can limit their indirect auto fair lending risk.
Some indirect auto lenders allow dealers to mark up the lender’s “buy rate,” i.e., the minimum interest rate at which the lender will purchase a given auto loan. The Bureau explains that the incentives and discretion associated with such markup policies create “significant” fair lending risk.
The bulletin sets out a number of theories under which the CFPB believes ECOA applies to indirect auto lending. Of particular note is the Bureau’s view that some indirect auto lenders “may be operating under the incorrect assumption” that they are not liable for pricing disparities caused by dealer markups. Further, the bulletin expressly states that disparities arising either “within a particular dealer’s transactions” or “across different dealers” could trigger liability.
The bulletin advises that indirect auto lenders should take steps to ensure ECOA compliance and states that such steps could include eliminating dealer markup discretion altogether, or imposing controls on markup policies and monitoring the effects of markup policies across borrower groups.
The bulletin also emphasizes the importance of developing “a robust fair lending compliance management program” to limit fair lending risk, and highlights compliance-management components that may be necessary to address “significant fair lending risks,” such as those associated with lenders that continue to allow dealer markups. The CFPB’s suggested compliance program components include “commencing prompt corrective action against dealers” with unexplained disparities and “promptly remunerating affected consumers” when unexplained disparities are identified either within an individual dealer’s transactions or across an indirect lender’s portfolio.
CFPB Bulletin 2013-02 puts the indirect auto lending industry on notice that the Bureau is focused on the fair lending risks associated with indirect auto pricing, but unfortunately leaves many critical questions unanswered.