Earlier today, the CFPB released its guidance bulletin with respect to automobile indirect finance fair lending issues. The bulletin’s intent is unmistakably clear from the accompanying press release’s tag line: “CONSUMER FINANCIAL PROTECTION BUREAU TO HOLD AUTO LENDERS ACCOUNTABLE FOR ILLEGAL DISCRIMINATORY MARKUP.” The bulletin is, in my view, a prelude to the fair lending enforcement actions that the CFPB intends to take against indirect auto finance companies later this year. We will be teaching a webinar focused on this very topic on April 16, which will feature an in-depth discussion of fair lending issues in the indirect auto finance industry. Here’s the link if you’re interested in registering.
There are several notable things about the bulletin that I thought I’d point out, that I think will be of special interest to the auto sales finance industry:
- The bulletin is explicitly directed toward both banks and non-banks. Even though non-bank auto finance companies (like manufacturer captives) are not subject to the CFPB’s examination authority (yet), they are subject to the Bureau’s enforcement authority, and so they should take this bulletin seriously.
- The bulletin confirms that the CFPB will be applying statistical analysis to determine whether there is a “portfolio imbalance” on the assignee level , not just a disparate impact based upon dealer-level analyses. This aggregation of contracts assigned by numerous dealerships, in my view, creates the real possibility that the CFPB will find “discrimination” to exist, even if no dealership engaged in any discriminatory conduct. My recent blog post on this issue discusses this in more detail.
- The bulletin does not address the issue of what proxies the CFPB will use, or what proxies it suggests that financial institutions should use, in conducting statistical analyses of portfolios of automobile retail installment sale contracts. Nor does the CFPB offer any guidance with respect to which variables should be part of the regression analysis – a key issue that can make a very large difference in the outcome, given the requirement that the facially-neutral practice actually be the cause of the disparity. I wish the CFPB had addressed these fundamental issues, instead of simply recommending statistical analyses without addressing these critical details.
- The bulletin stops short of mandating the elimination of dealer finance charge participation, offering alternatives such as implementing systems for monitoring and corrective action that involve communicating with dealers about compliance with the ECOA; monitoring dealer conduct through regular analyses of dealer-specific and portfolio-wide pricing data; taking action against dealers who appear to be engaging in discrimination; and promptly remediating affected consumers when unexplained disparities on a prohibited basis are identified either with respect to a particular dealership or at the assignee level. My own view is that the CFPB would prefer the elimination of dealer finance charge participation altogether, but it will be interesting to see if the Bureau regards these alternative measures as sufficient to prevent an ECOA enforcement action against an assignee of retail installment sale contracts.
- Finally, the bulletin seems to assume, without explanation, that the existence of a disparate impact is enough by itself to constitute a violation of ECOA, foreclosing the finance company’s ability to argue that dealer finance charge participation serves a legitimate business purpose and the government’s obligation to prove that the same purpose can be achieved by a less-impactful alternative. Even if one accepts that the disparate impact theory of liability is viable under ECOA (which is highly questionable), the traditional disparate impact analysis has at least three parts; the CFPB’s analysis seems to recognize only the first of those parts.
Overall, the bulletin is not surprising – it serves to confirm what we already knew regarding the CFPB’s view of dealer finance charge participation under retail installment sale contracts assigned to banks and sales finance companies. And it reinforces, in my mind, the very high likelihood that we will see enforcement actions on this issue in the relatively near future, with the bulletin forming the blueprint for the legal arguments that the Bureau will make in those actions. Stay tuned.