Indirect Lending Limits

March 25, 2013 at 8:07 am Leave a comment

imagesIn Friday’s blog, I talked about unintentional discrimination in mortgage lending.  Now that I have read the CFPB’s recent guidance on indirect automobile lending and its potential to violate the Equal Credit Opportunity Act, I figure this is as good a Monday as any to remind credit unions of some of the special risks associated with indirect automobile lending programs.

In its guidance released on Thursday the CFPB asserted that policies that allow auto dealers to mark up lender established buy rates and that compensate dealers for so doing pose a significant risk of violating the Equal Credit Opportunity Act by creating pricing disparities on the basis of race, national origin and other potentially prohibited bases.  The analogies between CFPB’s concerns about indirect auto lending and HUD’s concerns about mortgage practices that could potentially violate the Fair Housing Act are clear.

For example, in an indirect lending program, a lender may indicate at what rate it is going to purchase a loan but give the auto dealer the authority to negotiate a higher rate.  However, just as in the case of mortgage lending, simply because a lender is exercising discretion on a case by case basis, it isn’t shielded from discrimination liability if in exercising that discretion the effect is higher rates for minority customers or other groups protected by law.

First, some practical compliance advice.  From a credit union perspective, nothing in this guidance surprises me.  NCUA has expressed compliance concerns with indirect lending programs for several years.  Your contracts should specify what party is going to do the ultimate underwriting and that such lending should be done in conformity with the Equal Credit Opportunity Act.  In addition, when you enter into an indirect lending relationship, the credit union is still the institution ultimately responsible for ensuring that the car borrower is eligible for membership in your credit union and that appropriate Bank Secrecy Act protocols have been followed.  These are not the type of concerns that are going to be on the top of the list of your local car dealer.  To the extent you don’t exercise this oversight, you are putting your credit union’s reputation in jeopardy and running afoul not only of various regulations, but of NCUA’s due diligence guidance.  Bottom line:  there is nothing in this guidance which should surprise credit unions or cause a shift in their existing procedures if they have already been doing things properly.

However, in its press release, the National Automobile Dealers Association lays the groundwork for legally challenging the guidance.  First, it argues that CFPB doesn’t have adequate research to back up its assertion that indirect lending practices are violating the Equal Credit Opportunity Act.  Second, it argues that the CFPB should have worked with both the Federal Trade Commission and the Federal Reserve Board before imposing a guidance on the industry.  This cleverly subtle press release is a warning shot that litigation may soon follow.  As I said on Friday, disparate impact litigation may be the next big legal issue.

Entry filed under: Compliance, Legal Watch, Regulatory. Tags: , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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