Alert December 23, 2013

CFPB Takes Enforcement Action For Alleged Violations of ECOA

Resulting from an examination and subsequent joint investigation with the Department of Justice, the CFPB took enforcement action against a bank and bank holding company alleging violations of the Equal Credit Opportunity Act and its implementing regulation, Regulation B, related to the bank’s indirect auto lending program. In April 2013, the CFPB issued a guidance bulletin on indirect auto lending and compliance with ECOA and Regulation B (see April 2, 2013 Alert). In it, the CFPB indicated its interest in 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, in the bulletin, the CFPB warned supervised entities to take steps to ensure their compensation and markup policies for auto dealers complied with ECOA and Regulation B.

According to the consent order, the agencies reviewed the dealer markup of non-subvented retail installment contracts the bank purchased from auto dealers and analyzed the difference between the contract rate and the buy rate. The agencies concluded that minority borrowers—African American, Hispanic, and Asian/Pacific Islander—were charged statistically significant more basis points, respectively, in dealer markup than similarly situated whites. As a result, the agencies concluded that the bank was engaged in a pattern or practice of discrimination in lending.

The terms of the consent order require the bank and its bank holding company to (1) establish a compliance committee and submit a compliance plan addressing dealer compensation policies, notices to dealers explaining ECOA and the bank’s expectations for dealers, among other things, (2) pay a civil money penalty of $18,000,000 to the CFPB and DOJ, (3) deposit $80,000,000 into a settlement fund to be distributed to impacted consumers, and (4) submit to compliance monitoring and reporting.