Consumer Financial Protection Bureau (CFPB) Director Richard Cordray recently wrote a letter to Democrats on the U.S. House Financial Services Committee granting lawmakers a look inside the bureau’s effort to scrutinize indirect auto lenders. The letter, obtained by the American Bankers Association, indicates that the CFPB is encouraging certain lenders to beef up their efforts to monitor fair lending risk beyond the mortgage space.
A CFPB bulletin released in March clarifies that the agency has authority to pursue auto lenders whose policies harm consumers through unlawful discrimination. The bulletin explains how the Equal Credit Opportunity Act (ECOA) applies to indirect auto lending, an arraignment whereby a third-party lender provides an auto dealer with an interest rate that the lender will accept for a given consumer.
The bulletin explains that the standard practices of bank and nonbank indirect auto lenders likely make them “creditors” under ECOA and that a lender’s discretionary markup and compensation policies may alone be sufficient to trigger liability under ECOA if the lender regularly participates in a credit decision and its policies result in discrimination.
Following the release of the bulletin, a number of Democrats on the Financial Services Committee wrote a letter to Cordray seeking additional information on the CFPB’s work in this area.
“Certain policies and practices that allow discretion in pricing can create a significant risk of discrimination on the basis of race, national origin and other prohibited bases such as sex,” Cordray wrote in his response. “Historically, the failure to properly or consistently monitor such policies and practices for compliance with anti-discrimination laws has been a contributing factor in discrimination, both in auto lending and in other product markets like mortgages.”
Cordray also responded to questions regarding the methodology the bureau employs to determining whether fair lending violations exist within the auto market. He said the CFPB would typically review credit denials and interest rates quoted by the lender to the dealer, as well as any discretionary mark-up of that rate by the dealer.
“Determining whether discrimination has occurred is a case-specific and fact-intensive inquiry,” Cordray wrote. “The bureau is accordingly evaluating possible discrimination in both auto lending and in other markets on a case-by-case basis. Our analysis considers appropriate analytical controls in reviewing data to determine whether a specific policy results in unlawful differences on a prohibited basis.”
Cordray noted that assessing fair lending issues in the indirect auto lending space is complicated by the fact that information on race, ethnicity and gender is typically not collected as part of the transaction as is the case with a mortgage transaction. He said the bureau uses proxy methodology to differentiate among consumers based upon these characteristics. The bureau previously indicated that when it uses proxy data, we use both surnames and geographic location.
“The bureau has previously indicated that when we utilize proxy data, we use both surnames and geographic location. The bureau conducts its proxy analysis by using publicly available data from the Social Security Administration and the Census Bureau,” Cordray wrote. “We understand that many responsible lenders regularly use proxies in their own fair lending analyses where self-reported race, ethnicity and gender data are unavailable.”
Cordray said the bureau is encouraging lenders who are not currently doing so to “select a reasonable proxy method” to monitor their fair lending risk. He also made it clear that the bureau is concerned about fair lending issues outside of the mortgage space.
“In the course of the bureau’s supervisory work, we have found frequent instances where lenders had robust fair lending compliance programs for mortgage lending, but weak or non-existent fair lending compliance programs for other types of consumer lending,” Cordray wrote.
View Cordray’s letter
View the Democrats’ letter
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CFPB takes aim at auto lending discrimination