Compliance Blog

Hi all - My name is Michael Emancipator. I am the new Senior Regulatory Affairs Counsel, and I am thrilled to be a part of the NAFCU team! On occasion, I will write for this blog to help credit unions interpret regulations and compliance issues that come out of DC. Though I already met some of you at NAFCU's Congressional Caucus, I look forward to hearing from each of you on these issues. I know many are working on last minute preparations relating to tomorrow's TILA/RESPA Integrated Disclosures deadline, but I thought you may want to take a break and look at the CFPB's continued focus on indirect lending.

On September 28, the CFPB and Department of Justice announced an auto-lending enforcement action against Fifth Third, charging $18M in restitution to affected consumers. The action also required Fifth Third to change their pricing and compensation system for its indirect auto-lending program. The joint action alleged that Fifth Third's program did not contain enough safe-guards to prevent auto dealers from illegally charging a higher rate to minority borrowers.

In an indirect auto-lending program, the auto dealer sends a loan application for a car to the bank or credit union, which underwrites the application and sets a loan rate based on the creditworthiness of the applicant. The problem comes during the next step. After the dealer receives the buy rate, some indirect programs give the auto dealer the discretion to increase the rate when they finalize the deal with the customer, regardless of the borrower's creditworthiness - this is called the dealer markup.'

With the enforcement action, the CFPB argued that Fifth Third's indirect auto-lending program allowed auto dealers to establish a pattern and practice of discrimination by charging African-American and Hispanic borrowers higher dealer markups than for non-Hispanic white borrowers - a violation of the Equal Credit Opportunity Act.

The CFPB's evidence of a pattern and practice of discriminating against minorities was not direct. When Fifth Third provided its auto loan information to the CFPB, it did not contain any information about race or national origin (since federal law prohibits such disclosures in auto lending). Instead, to evaluate any differences in dealer markup, the CFPB used proxy data that looks to determine race by looking at surnames, geographic location or a combination of both. While this proxy method has been called into question by many industry stakeholders, the CFPB continues to use this in its enforcement actions relating to indirect lending. In this particular action, the hook that the CFPB hung its hat on was the auto-dealer's complete discretion for dealer markups, and Fifth Third's insufficient monitoring of the program.

The CFPB noted the following practices as key to overseeing indirect auto lending relationships:

• Imposing controls on dealer markup, or otherwise revising dealer markup policies
• Monitoring and addressing the effects of markup policies as part of a robust fair lending compliance program;
• Eliminating 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

Also, following is a list of other useful sources:

• NCUA Fair Lending Guide:  NCUA's Office of Consumer Protection issued a Fair Lending Guide in March of 2013.  The guide gives a great overview of fair lending.
• NCUA Fair Lending FAQs
• NCUA Fair Lending Compliance Best Practices
• CFPB Supervisory Highlight on Indirect Auto Lending
• CFPB Bulletin on Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act

***

ESIGN: Electronic Records and Signatures for Risk Management

Please join us for a webcast on Wednesday, October 7 from 2:00 until 3:30 p.m. EST on ESIGN and risk management. Online and mobile access to accounts, as well as other electronic communications, have become a key driver for customer acquisition and retention. Ensure your credit union is up-to-date with the laws governing the use of electronic records and signatures by attending this webcast. You'll learn how the laws governing the use of electronic records and signatures work, as well as insight into the latest regulatory and judicial developments, and more.