On March 21, the Consumer Financial Protection Bureau (CFPB) issued bulletin 2013-02, explaining that certain lenders that offer auto loans through dealerships are responsible for unlawful, discriminatory pricing. Although this bulletin provides guidance to indirect auto lenders within the CFPB’s jurisdiction, it is important for all credit unions that have indirect lending relationships to note the potential violations to the Equal Credit Opportunity Act (ECOA) that may occur in these types of relationships. Specifically, indirect auto lenders may not permit dealers to increase consumer interest rates and compensate dealers with a share of the increased interest revenues. Because of the incentives these policies create, and the discrimination they permit, there is a significant risk that they will result in pricing disparities on the basis of race, national origin and potentially other prohibited biases.
Credit unions should take steps to review their existing indirect relationship and lending program to ensure they are operating in compliance with the ECOA and Regulation B as applied to dealer mark up and compensation policies. These steps may include, but are not limited to:
· 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;
· Eliminating dealer discretion to mark up buy rates, and fairly compensating dealers using a different mechanism that does not result in discrimination, such as flat fees per transaction.
For reference, there are steps included in the CFPB bulletin, along with some features of a strong fair lending compliance management program.