CFPB Fair Lending Guidance For Indirect Auto Lenders—It’s Not Just About Cars

Several weeks ago, the Consumer Financial Protection Bureau ("CFPB") issued a fair lending guidance bulletin ("Bulletin") directed at financial institutions that make indirect automobile loans. While the Bulletin thus far has not attracted widespread public attention, in the intervening period we have reflected at greater length on the Bulletin and its implications in the fair lending arena. In our view, financial institutions of all stripes that are subject to CFPB jurisdiction—and even those that are not—are well advised to study closely the Bulletin and its implications for CFPB fair lending compliance and enforcement activities across the regulatory spectrum, because the Bulletin raises several notable—and potentially troubling—compliance and liability issues.

The Bulletin represents an aggressive approach by the CFPB to the issue of fair lending compliance and enforcement that most definitely is not limited in its impact to indirect auto lenders. The Bulletin proposes significant interpretations of Regulation B, which implements the Equal Credit Opportunity Act ("ECOA"), without following the Administrative Procedure Act ("APA"), which applies to federal agency rulemakings. Further, the guidance contradicts numerous pronouncements from CFPB officials that the CFPB intends to create a level playing field for all market participants,1 as the Bulletin claims not to apply to "small" lenders that are not subject to direct CFPB supervision, yet are otherwise subject to the ECOA and its implementing Regulation B. In addition, the Bulletin revives a controversial theory of disparate impact liability that private litigants and the Department of Justice ("DOJ") began advancing in the late 1990s, raising a question of whether lenders and dealers should expect a second wave of government enforcement and private litigation actions. In turn, lenders affected by this Bulletin would do well to reexamine and, as necessary, modify their pricing practices.

Overview of the CFPB's Fair Lending Guidance

The Bulletin sets forth the CFPB's understanding of the indirect automobile lending industry, with a specific focus on the practice whereby a lender allows a dealer to set, within certain parameters, a consumer's interest rate and obtain a share of the payments (identified by the CFPB as "reserve" or "participation"). Such a pricing approach is recognized by the CFPB as a way of compensating dealers for the "value they add by originating loans and finding financing sources." The CFPB notes that its supervisory experience confirms that several indirect automobile lenders have established policies that permit dealer partners to engage in this type of "reserve" or dealer discretionary pricing practice.

The Bulletin expresses the CFPB's belief that allowing motor vehicle dealers to engage in discretionary markups creates a significant risk that loan pricing disparities will occur on a prohibited basis such as race, color, religion, national origin, sex, marital status or age. Further, the CFPB cautions that indirect lenders will be viewed as participants in any discriminatory pricing by dealers due to their role in the auto loan credit decisioning process. The CFPB supports this view by noting that the ECOA, which prohibits discriminating against credit applicants on a prohibited basis, applies to "creditors," which includes any assignees of an original creditor that participate in a decision to extend credit. The Bulletin provides specific examples of indirect lenders participating in the credit decisioning process, thereby becoming ECOA "creditors." These examples include lenders evaluating applicant information to establish a "buy rate" and lenders providing rate sheets to dealers, both of which are established practices in the indirect auto lending market. While the CFPB notes that some indirect lenders have no participation in the credit process, the Bulletin's examples appear to relate to even the most basic pricing and marketing functions of indirect lending.

To address potential fair lending violations, the CFPB suggests that lenders that continue to offer discretionary pricing take steps to ensure they are complying with the ECOA and...