WASHINGTON (3/22/13)--The Consumer Financial Protection Bureau on Thursday reminded indirect auto lenders of their compliance responsibilities under the Equal Credit Opportunity Act (ECOA).
The Thursday bulletin was meant, in part, to clarify the CFPB's authority to pursue auto lenders whose policies can, at times, be used to harm consumers through unlawful discrimination.
ECOA makes it illegal for a creditor to discriminate in any aspect of a credit transaction on prohibited bases including race, color, religion, national origin, sex, marital status, and age. The CFPB has authority to examine large banks, and credit unions--and their affiliates--with more than $10 billion in assets.
Indirect auto lenders often allow auto dealers to mark up the interest rates that are offered to consumers, and lenders may then share part of the revenue from that increased interest rate with the dealer, the CFPB explained. These markups can generate compensation for dealers, and give dealers the discretion to charge different rates to different consumers, without taking their creditworthiness into account. Lender policies that provide dealers with this type of discretion increase the risk of pricing disparities among consumers based on race, national origin, and potentially other prohibited bases, the CFPB said.
"Consumers should not have to pay more for a car loan simply based on their race," CFPB Director Richard Cordray added.
To ensure they are in compliance with fair lending regulations, the CFPB recommended that indirect lenders:
- Impose dealer markup controls or revise dealer markup policies;
- Monitor and address the effects of markup policies as part of a robust fair lending compliance program; and
- Eliminate dealer discretion to markup buy rates, and fairly compensating dealers using a different mechanism that does not result in discrimination, such as flat fees per transaction.
Other steps are also addressed in the bulletin. The CFPB said it "will continue to closely review the operations of both depository and non-depository indirect auto lenders, utilizing all appropriate regulatory tools to assess whether supervisory, enforcement, or other actions may be necessary to ensure that the market for auto lending provides fair, equitable, and nondiscriminatory access to credit for consumers."
Credit unions provide both direct and indirect loans to prospective motor vehicle purchasers, and 95% of credit unions nationwide are involved in the auto loan business. Consumers that use credit union loans instead of bank-originated loans to purchase a new vehicle worth $30,000 would save an average of $1,300 over the span of a five year loan, according to CUNA estimates.
For more on the CFPB bulletin, use the resource link.