The Consumer Financial Protection Bureau issued guidelines for how indirect auto lenders can avoid violating the Equal Credit Opportunity Act (“ECOA”). In recent months, the Consumer Financial Protection Bureau has focused on auto lenders potential violations of the Equal Credit Opportunity Act (ECOA).
The ECOA prohibits lenders from discriminating against borrowers based on specific protected classes which include race, color religion, national origin, sex, marital status or age.
The CFPB is primarily concerned with situations where the dealer charges additional interest or a reserve. The concern is that members of protected classes may be charged higher rates for their loans, which may violate ECOA.
While some indirect lenders may claim that they are not liable under the ECOA because they are not originating the credit or directly accepting the application, the CFPB had indicated that they would still be liable if they make a credit decision (such as offering a rate or agreeing to buy a loan at a set rate) or if they know that the car dealer is violating the ECOA.
Although the CFPB has been focusing on indirect auto lenders for ECOA violations, they offered tips for indirect auto lenders which include:
- Imposing controls on dealer markup, or otherwise revising dealer markup policies;
- Monitoring and addressing the effects of markup policies as part of a robust fair lending compliance program; and
- Eliminating dealer discretion to markup buy rates, and fairly compensating dealers using a different mechanism that does not result in discrimination, such as flat fees per transaction. (See CFPB Bulletin March 21, 2013).
Indirect auto lenders are facing stricter scrutiny under the CFPB. They should develop or revise their programs to ensure that the dealers they work with are not engaging in discriminatory practices. Auto lenders will need to make sure they have a well-developed program and continued monitoring of its dealers. In this age of heightened scrutiny, the best defense may be a good offense.