Alert April 02, 2013

CFPB Releases Guidance on Indirect Auto Lending and ECOA

The CFPB issued a guidance bulletin on indirect auto lending and compliance with the Equal Credit Opportunity Act and its implementing regulation, Regulation B. According to Director Richard Cordray, the bulletin "clarifies [the CFPB’s] authority to pursue auto lenders whose policies harm consumers through unlawful discrimination." The CFPB is targeting the policies of indirect auto lenders that allow auto dealers discretion to mark up interest rates charged to consumers above the indirect auto lender’s "buy rate"—the minimum interest rate that the lender is willing to purchase the retail installment sales contract executed by the consumer for the purchase of the automobile—and compensate auto dealers based on the difference in interest revenues between the buy rate and the actual note rate charged to the consumer. Noting the incentives and discretion such practices create, the CFPB stated "there is a significant risk [that these policies] will result in pricing disparities on the basis of race, national origin, and potentially other prohibited bases."

The bulletin advises that when pricing disparities exist, indirect auto lenders may be liable under both the disparate treatment and disparate impact legal doctrines. The bulletin recommends that indirect auto lenders take steps to ensure that their compensation and markup policies comply with ECOA and Regulation B, including, but not limited to: (1) imposing controls on such policies, (2) monitoring and addressing unexplained pricing disparities or (3) eliminating auto dealers’ discretion to mark-up the interest rates charged to consumers. The bulletin suggests that indirect auto lenders consider implementing flat fee per transaction compensation policies.