Pub. 4 2013 Issue 3

www.wvbankers.org 16 West Virginia Banker A recent proclamation by the Consumer Financial Protection Bureau (CFPB) makes clear the intent of the agency in enforcing the Equal Credit Opportunity Act (ECOA) to hold indirect auto lenders liable for auto dealers’ illegal rate mark- up practices. Bulletin 2013-12, entitled Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act, published March 21, 2013, declares that an indirect auto lender’s markup and compensation policies may trigger ECOA liability if the lender “regularly participates in a credit decision and its policies result in discrim- ination.” By publishing a bulletin rather than engaging in the formal rulemaking process, CFPB avoided regulatory trans- parency and eliminated any opportunity for public comment, leaving lenders uncertain as to reasonable steps that can be taken to conform their policies and practices. Although the CFPB Bulletin directly applies only to lenders supervised by the CFPB (banks with assets of $10 billion or more), community banks should also be concerned because the guidance raises troubling compliance and liability issues with respect to fair lending and Reg- ulation B, legal requirements that apply to all lenders. In indirect auto financing, the dealer generally collects basic information from an applicant and forwards the informa- tion, typically the credit score and income and debt data, to prospective auto lenders. After evaluating the applicant, the indirect auto lenders may communicate to the dealer a “buy rate” – the minimum interest rate at which the lender will purchase the installment sale contract signed by the customer. The auto dealer then is allowed to mark up the interest rate above the buy rate, and the difference between the buy rate and the dealer’s markup note rate is paid to the dealer as a “reserve” or a “par- ticipation” compensation. By this method, lenders are able to compensate dealers for their loan originations and referrals. This practice, according to the CFPB, injects subjectivity into the financing process creating deal discretion which may lead to illegal discriminatory pricing practices and disparate treatment and/ or impact. Because auto dealers avoided regulation under the Dodd-Frank Act, the perception is that the CFPB seeks to police auto dealers indirectly by holding lenders accountable for their markup and com- pensation policies. For example, an auto lender with pricing disparities in its portfo- lio attributable to alleged illegal practices by an auto dealer may come within CFPB or even Department of Justice Civil Rights Division scrutiny. To avoid its identified risk of the indirect lending system, the CFPB has told the banking industry to consider strongly tak- ing steps to operate within the ECOA and Regulation B, including the following: 1. Imposing controls on dealer markup and compensation policies, analyzing the pricing data for potential dispari- ties on a prohibited basis, and address- ing unexplained disparities; 2. Eliminating dealer discretion in the markup of interest rates and develop- ing other mechanisms in fairly com- pensating dealers to avoid inferences of discrimination, such as with a flat fee structure; and 3. Communicating an up-to-date fair lending policy and stated compliance with the ECOA, which should include a compliance program comprised of monitoring procedures and policies for potential fair lending violations and fair lending training for affected employees. Critics have charged that the CFPB has not foreseen the likely increased cost of credit to consumers if lenders must change the way they compensate dealers. One commentator concludes that the CFPB’s pronouncement in essence makes dealer discretion in the markup of interest rates discriminatory per se. A Congressional delegation also has viewed the controls as “onerous and unrealistic” and as limiting consumer choice. Others claim that the Bulletin is an ill-fated attempt to solve a problem that may not exist or is better cured by legal action targeting offending auto dealers. Nevertheless, despite the course of criti- cism, the CFPB Bulletin is now part of the new regulatory landscape that the Dodd- Frank Act has generated. Many lenders already have asserted pressure on auto dealers to demonstrate compliance with fair lending regulations, and the National Independent Automobile Dealers Asso- ciation has endorsed fair lending training programs for its dealership members. Financial institutions which have ongoing indirect lending relationships with auto dealers are wise to focus on the CFPB’s enforcement agenda and to eliminate deal discretion. n Charles F. Printz, Jr. E-mail: cprintz@bowlesrice.com Phone: 304-264-4222 Sandra M. Murphy E-mail: smurphy@bowlesrice.com Phone: 304-347-1131 Holding Lenders Liable for Auto Dealers’ Interest Rate Decisions New CFPB Strategy Lacks Transparency and Creates Uncertainty for Lenders By Charles F. Printz, Jr. Sandra M. Murphy Should you require more information, please feel free to contact Charles F. Printz, Jr. or Sandra M. Murphy Mr. Printz and Ms. Murphy are partners with Bowles Rice LLP. Mr. Printz focuses his practice in business litigation and employment law, and Ms. Murphy focuses her practice in banking, commercial law and corporate transac- tions. Bowles Rice LLP is general counsel to the West Virginia Bankers Association. The authors present these materials with the understanding that the information provided is not legal advice. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using these mate- rials should always research original sources of authority and update this information to ensure accuracy when dealing with a specific matter. No person should act or rely upon the information contained in this publication without seeking the advice of an attorney. This is an advertisement. ©2013 Bowles Rice LLP