Regulators Examine Lender Portfolios in Dealer Discrimination Investigations
State and federal regulators, including the Consumer Financial Protection Bureau (CFPB) and the New York State Department of Financial Services (DFS) – look to lender portfolios to indirectly monitor the disparate impact at auto dealerships.
The disparate impact in the auto finance arena refers to intentional or unintentional discrimination that requires business justification as to why protected groups are denied or pay higher rates, Jean Noonan, partner of Hudson Cook law firm, said Auto finance news. “If a dealer consistently charges African Americans or Latinos more than non-Hispanic whites, then they have an explanation for it.”
In a recent DFS investigation, for example, two banks were penalized for allowing discriminatory dealer markups. Based in Saratoga Springs, NY Adirondack Trust Company was fined on June 29 after discovering that black, Asian and Hispanic buyers of the bank were paying significantly higher rates than non-Hispanic whites. Meanwhile, New York-based Elmira Chemung Canal Trust Company was also fined in June because its Hispanic borrowers paid higher fees than non-Hispanic white borrowers. Adirondack Trust will donate $ 275,000 to New York State and $ 50,000 to community development organizations while Chemung Canal will donate $ 350,000 to the state.
Although dealers make pricing decisions contract by contract, the CFPB has looked to lender portfolios to determine any discriminatory mark-ups, according to a legal file from Hudson Cook. Legitimate reasons include beating a competitor’s rate and manufacturer incentives that are part of the contract.
Different minority groups can have varying average margins within a lender’s portfolio, however, “if that difference is 10 basis points or more, we’re going to call it discrimination,” Noonan said.
Lenders should urge their partner dealers to keep track of the business justifications for which some buyers have higher margins than others in order to protect themselves from inaccurate claims of discrimination.
To avoid charges of discrimination and costly lawsuits, dealers can adopt the Fair Credit Compliance Policy and Program published in 2014 by the National Association of Automobile Dealers, the American Association of International Automobile Dealers and the National Association of Minority Automobile Dealers.
The program addresses intentional and unintentional disparate impact discrimination and strengthens the efforts of dealers to comply with fair credit laws, according to NADA. Under the program, dealers set a pre-defined standard dealership participation rate and only deviate from the Annual Percentage Rate (APR) if there is a qualifying business reason.
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