Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel
Last Wednesday, Victoria wrote a round-up of recent CFPB enforcement actions. Later that day, the Wall Street Journal reported on yet one more: large auto lender Santander Consumer USA Holdings Inc. (Santander) said the CFPB has alleged that it violated U.S. fair lending laws. Specifically, the CFPB has alleged that Santander has violated the Equal Credit Opportunity Act (ECOA) by overcharging “protected groups” of consumers on auto loans made through car dealerships.
This is only the latest CFPB action focusing on indirect auto lending. Earlier this month, the CFPB called for Fifth Third Bank to cut its dealer markup to avoid possible discrimination in its auto-lending business. In July, the CFPB and the Department of Justice announced a $25 million settlement to resolve discriminatory auto lending practices by American Honda Finance Corporation. In September, 2014 the CFPB announced its intention to extend its supervisory authority to nonbank auto lenders. The same month an article appeared in The NCUA Report from the Office of Examination and Insurance Report cautioning credit unions about the dangers of indirect auto lending.
As we enter the 2016 model year, and in light of the CFPB’s allegations against Santander, now might be a good opportunity to review NCUA’s expectations for indirect lending relationships. In August, 2010, NCUA issued Letter to Credit Unions no. 10-CU-15 regarding the unintended exposures to risk which can result from indirect lending relationships. This letter was primarily focused on safety and soundness, and did not specifically address the ECOA, but it did cite dealer incentives and compensation programs as possible areas of risk and discussed the importance of clear vendor policies and consistent reviews.
While NCUA still has supervisory authority over credit unions with $10 billion or less in assets regarding compliance with the ECOA, Bulletin 2013-02 issued by the CFPB gives useful guidance on avoiding ECOA issues in indirect lending relationships. NCUA has indicated in its Fair Lending Examination and Compliance Program Questions and Answers that credit unions should review their indirect lending programs in conjunction with this CFPB bulletin to ensure their programs comply with ECOA and Regulation B. (See Question 21).
Both the NCUA’s Letter to Credit Unions and the CFPB’s Bulletin cite dealer mark-up and compensation policies as a major area of potential risk. The CFPB Bulletin recommends eliminating dealer discretion to markup buy rates and finding other mechanisms to compensate dealers that cannot result in discriminatory treatment. In the alternative, it recommends imposing controls on dealer markup and compensation policies, and monitoring these policies to ensure compliance and to address unexplained pricing disparities.
A credit union may not have sufficient leverage to negotiate a competitive program for its members while disallowing dealer mark ups. In that situation, the CFPB recommends sending communications to all participating dealers explaining the ECOA, the credit union’s expectations with respect to ECOA compliance, and the dealer’s obligation to markup interest rates in a non-discriminatory manner. Then the CFPB recommends follow up in the form of regular analysis of dealer-specific and portfolio-wide loan pricing data to locate potential disparities, and where disparities are prohibited by the ECOA, taking corrective action against dealers and properly remunerating any affected members.
Finally, NCUA’s Letter to Credit Unions and the CFPB bulletin both emphasize the important of robust compliance management programs. The AIRES Questionnaire regarding indirect lending requires review of dealer compensation programs to ensure it is competitive, yet fair. It also requires a credit union have policies in place regarding dealership compensation. The difficulty of establishing an indirect lending program where dealer compensation is competitive, yet fair and nondiscriminatory toward members is challenging. It’s clear it is an issue that will not be going away anytime soon.
NAFCU Seeks Member-CU's Input for Report to Fed
In other news, NAFCU is asking members to complete a survey on a range of issues, including the impact of CFPB's qualified mortgage rule, the Durbin Amendment and NCUA's proposed risk based capital rule, in preparation for this year's meeting between its board and Federal Reserve Board Gov. Jerome Powell. The deadline for survey submission is Sept. 11.