Auto dealers do not fall under the jurisdiction of the Consumer Financial Protection Bureau (CFPB) for a good reason – car loans did not cause the financial collapse that triggered the law that created the CFPB. But that is not stopping the regulators from trying to impose their will on the industry. By pressing banks to review the loan portfolios originating at each of their participating dealerships, the CFPB hopes to alleviate what is known as “disparate impact.” This occurs when minorities, women or the elderly receive less-than-favorable financing terms even when intentional discrimination has not occurred. Banks have been sending letters recently to dealers to advise them of disparate impact in their lending practices and the potential for further action, which may include termination of the bank’s dealer agreement or placing the dealer on a flat-fee compensation schedule. The National Auto Dealers Association has serious problems with the way the CFPB is proceeding, not the least of which is that the sampling techniques appear to be flawed.
Regardless, dealers should be prepared and proactive in attempting to mitigate any adverse actions. Michael Charapp, Esq. of Charapp and Weiss, LLP suggests that dealers should take the following steps:
- Establish a fair lending policy.
- The policy must prohibit F&I personnel from setting interest rates.
- Have a fixed starting point for financing terms, including interest rates.
- Permit deviations only for specified, nondiscriminatory reasons.
- Require management approval for other deviations.
- Keep records to support deviations.
Similarly, Paul Metrey, Chief Regulatory Counsel for NADA, suggests that dealerships adopt a strong anti-discrimination policy, and implement an effective Equal Credit Opportunity Act (ECOA) training and oversight regimen. He also suggests that dealers consider adopting measures that are contained in two consent orders that the Justice Department entered into with franchised dealers in 2007. They mandate that downward rate deviations from a predetermined rate should only be for good-faith, competitive reasons that are consistent with ECOA and that any downward rate deviations should be well documented and reviewed by the General Manager. The acceptable reasons for deviations provided by these consent orders are:
- Customer stated monthly payment constraint of a certain dollar amount per month
- Customer stated that he or she has access to a more favorable offer from another dealer or lender (must identify offer)
- Dealership offered special promotional financing to all customers on the same terms
- Customer qualified for special promotional factory or other discounted interest rate
- Customer qualified for dealership’s Employee Incentive Program
- Inventory reduction considerations applied (must specify)
In summary, dealers should be diligent in their efforts to comply with ECOA. At the very least, they should implement a fair lending policy, train the appropriate employees in the administration of that policy and strictly enforce violations of the policy.
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