In August, representatives from the Consumer Financial Protection Bureau (CFPB), the Federal Reserve Board (FRB) and the Department of Justice (DOJ) hosted a joint webinar to discuss fair lending considerations in indirect auto lending. The latter two agencies were forthcoming; the former not so much.
The webinar was kicked off by Patrice Ficklin, the CFPB’s director of fair lending. She provided a review of the bureau’s authority to regulate fair lending. She also noted that the CFPB has enforcement authority over those who violate federal consumer financial laws, including entities that offer or provide consumer financial products or services. And that authority extends to nonbanks not subject to the CFPB’s supervisory jurisdiction.
Ficklin provided a description of the indirect transaction and addressed how discretion in pricing created fair lending risk that may alone be sufficient to trigger violations of the Equal Credit Opportunity Act (ECOA), specifically on the basis of race, national origin or other prohibited bases. Finance sources, she said, could reduce fair lending risks by imposing more controls on dealer markup policies or by switching to flat fees.
Notably, the CFPB did not reveal the statistical approach it’s using to determine discrimination. That wasn’t the case during the FRB’s portion of the webinar. Maureen Yap, special counsel and manager of fair lending enforcement for the FRB, outlined the agency’s approach to fair lending in bank exams, noting that it is based on the 2009 Interagency Fair Lending Examination Procedures. Risk factors for credit discrimination include consumer complaints, policies or procedures that indicate discretion in pricing, compensation based upon loan terms, and statistical data indicating pricing disparities on a prohibited basis.
Yap also shared in detail how the FRB determines a borrower’s race, ethnicity and gender using geocodes, which the agency also uses to determine majority/minority census tracts. She said U.S. Census data is also used to determine ethnicity and gender based on first names (gender) and surnames (ethnicity). Once coded, the FRB compares pricing of loans in majority/minority Census tracts vs. loans in nonmajority/minority Census tracts.
For ethnicity, the FRB codes surnames based upon U.S. Census data and compares pricing of loans to Hispanics and non-Hispanics. For gender, first names of single debtors are coded based upon a U.S. census list of common male and female first names and pricing comparisons are made.
If pricing disparities are found, Yap said the FRB will seek additional information about pricing and pricing criteria. It may review loan files and will give the bank an opportunity to explain its findings. She also offered four ways lenders can mitigate fair lending risks, including reviewing policies and procedures, addressing complaints, and providing training to parties involved in credit underwriting.
Although the FRB does not regulate auto dealers and finance companies, nonbank entities engaged in auto finance should consider the approach Yap outlined as indicative of the FRB’s fair lending examination, enforcement and expectations of other regulators.
Coty Montag, deputy chief of the housing and civil enforcement section of the DOJ’s Civil Rights Division, also outlined the agency’s jurisdiction under the ECOA, noting that the U.S. attorney general may file suit if there is a reasonable basis to believe the creditor has engaged in a pattern or practice of discrimination. Montag, who indicated that the DOJ would turn its focus on race-based targeting by buy-here, pay-here dealers, as well as on discrimination in discretionary markups and fees in auto lending, revealed that the agency is conducting several joint investigations with the CFPB.
The ECOA prohibits credit discrimination on the basis of race, gender, ethnicity and several other factors, and that’s what these three agencies are obviously focused on. To that end, those in the auto finance industry should expect a high level of scrutiny of credit pricing, and should proactively review their business practices and loan and contract portfolios for evidence of discrimination. Doing so may be your best defense.