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CFPB, FRB and DOJ Host Fair Lending Webinar
By Nicole F. Munro

On July 21, 2011, Title X of the Dodd-Frank Act established the Consumer Financial Protection Bureau. The CFPB supervises banks with over $10 billion in assets and their affiliates, and nonbanks of all sizes that offer or provide mortgages and related services, private education loans, and payday loans. The CFPB also supervises larger participants in other markets, as defined by the Bureau, and other nonbanks the Bureau finds are engaged in conduct that poses a risk to consumers. The CFPB has yet to define "larger participants" in the auto finance market but is already making a big impact in the fair lending arena.

The focus on discrimination in the marketplace is not limited to the CFPB. The Federal Reserve Board and the Department of Justice are also scrutinizing credit practices with an eye toward credit discrimination.

In August, representatives from the CFPB, the FRB, and the DOJ hosted a joint webinar to discuss fair lending considerations in indirect auto lending.

In the meeting, Patrice Ficklin, the CFPB's Director of Fair Lending, reviewed the Bureau's authority to regulate fair lending. In her presentation, Ficklin noted that the CFPB has enforcement authority over those who violate federal consumer financial laws, which includes authority over those who offer or provide consumer financial products or services, and extends to nonbanks not subject to the CFPB's supervisory jurisdiction.

Ficklin provided a description of the indirect transaction. Referencing prior litigation and research, Ficklin also addressed how discretion in pricing created fair lending risk that may alone be sufficient to trigger violations of the Equal Credit Opportunity Act on the basis of race, national origin, and potentially other prohibited bases.

Ficklin explained how indirect finance sources can reduce fair lending risk, including:

  • imposing controls on dealer markup and compensation policies, or otherwise revising dealer markup and compensation policies, and monitoring and addressing the effects of those policies (through dealer communications, regular analysis, prompt corrective action, and consumer remuneration) so as to address unexplained pricing disparities on prohibited bases; or
  • eliminating dealer discretion to mark up buy rates and fairly compensating dealers using another mechanism, such as a flat fee per transaction that does not result in discrimination.

Notably, the CFPB did not indicate the statistical approach it takes to determine race, ethnicity, and gender for its fair lending analyses.

Maureen Yap, Special Counsel/Manager of Fair Lending Enforcement for the FRB, followed Ficklin and outlined the FRB's approach to fair lending in bank exams, noting that the FRB's approach to fair lending was 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 reviewed in detail how the FRB determines a borrower's race, ethnicity, and gender using geocodes to determine majority-minority census tracts and U.S. census data to determine ethnicity and gender based upon first names (gender) and surnames (ethnicity). Once coded, the FRB compares pricing of loans in majority-minority census tracts vs. loans in non-majority-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. Yap included in the materials a step-by-step protocol to code loans by ethnicity and gender.

If pricing disparities are found, 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 the FRB's findings.

Finally, Yap gave examples of how to mitigate fair lending risks, as follows:

  • review and address complaints regarding potential pricing discrimination;
  • review policies, procedures, rate sheets, and dealer agreements to determine the level of discretion provided in loan pricing;
  • review dealer agreements to determine whether financial incentives are based on the price of the loans; and
  • provide training to parties involved in credit underwriting.

If there is an elevated risk and sufficient volume, lenders are expected to conduct - on a regular basis - a periodic internal statistical analysis of loan pricing and address any unexplainable disparities.

The FRB's ECOA authority is limited to member banks below the $10 billion mark. Although the FRB does not regulate auto dealers and finance companies, those nonbanks engaged in auto finance should consider the approach outlined by the FRB to fair lending examination and risk mitigation to be indicative of the examination, enforcement, and expectations of other regulators.

Coty Montag, Deputy Chief of the Housing and Civil Enforcement Section of the Civil Rights Division of the DOJ, followed Yap by outlining DOJ jurisdiction under ECOA, noting that the U.S. Attorney General may file suit if there is a reasonable basis on which to believe that a creditor has engaged in a pattern or practice of discrimination. Montag then reviewed several fair lending enforcement actions. She concluded by indicating that the DOJ would focus on race-based targeting by "buy-here, pay-here" auto dealers and on discrimination in discretionary markups and fees in auto lending, including several investigations being conducted jointly with the CFPB.

The ECOA prohibits credit discrimination on the basis of race, gender, ethnicity, and several other factors. The agencies that regulate the credit industry are focused intently on preventing credit discrimination on a prohibited basis. 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.

Finding and correcting a problem before your regulator does may be your best defense.

To hear the webinar, go to http://www.philadelphiafed.org/bank-resources/publications/consumer-compliance-outlook/outlook-live/2013/indirect-auto-lending.cfm.

Nicole F. Munro is a partner in the Hanover, MD office of Hudson Cook, LLP. Nikki can be reached at 410-865-5430 or nmunro@hudco.com.

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