Here at Ncontracts, we tend to emphasize the important role of policies and procedures in ensuring Fair Lending compliance. If you want to make sure similarly situated borrowers are treated consistently, having clear underwriting standards is essential.
Recognizing the role fair lending processes play in our organizations, we need to expand our written documentation to include fundamental elements that I didn’t think needed to be spelled out. However, based on recent enforcement actions it clearly needs to be addressed: Those policies must also comply with Fair Lending regulations. Don’t include anything in your policies and procedures that promotes discriminatory lending.
Sounds obvious, right?
Apparently not to an auto dealership in New York. The dealership and its general manager just settled with the Fair Trade Commission (FTC) for $1.5 million for alleged discriminatory lending against African-American and Hispanic car buyers (among other shady business practices). They are accused of violating the FTC Act, the Truth in Lending Act (TILA), and the Equal Credit Opportunity Act (ECOA). It is the first time regulators have directly accused an auto dealer of discriminatory lending.
What Allegedly Happened?
The FTC says the dealership “instructed sales personnel to charge African-American and Hispanic consumers higher markups and additional fees, leading to higher prices for vehicles” because they have “limited education.” "Employees were told not to tack on the fees when dealing with non-Hispanic white consumers."
The FTC also alleges the dealership “maintain[ed] a specific policy and practice” where the sales staff had the discretion to add a finance charge to the buy rate. Not only was the markup not based on any underwriting standard or credit risk, but employees got a percentage of the markup as compensation.
On average, African-American consumers were charged about $163 more in interest than similarly situated non-Hispanic white consumers, the complaint said. Hispanic consumers were charged about $211 more in interest.
This had been going on since 2010, according to the FTC.
As part of the settlement, the dealership will have to establish a Fair Lending program, including a cap on interest markups.
My Institution Would Never Do That. Is There Any Takeaway for Me?
This is a clear case of discrimination with evidence of intent—and that makes it unusual. As FTC Commissioner Rohit Chopra wrote in a concurring statement supporting the FTC’s complaint against the dealership, it’s rare to find clear evidence of deliberate discrimination.
Chopra used the opportunity to promote the belief that the FTC should use disparate impact analysis and other tools to uncover hidden discrimination. As artificial intelligence and other technologies make it easier to ascertain borrower race and other protected categories, he’s concerned that this could result in discriminatory algorithms.
He wants to see a future of data-driven detection of discrimination.
Will the FTC and other regulatory agencies make more use of data and Fair Lending Analytics to uncover Fair Lending violations? If so, does your FI have the tools to analyze its own lending data to ensure similarly situated borrowers are treated consistently?
We can’t predict what the FTC or other regulators will do in the future, but we can help to uncover and address potential Fair Lending issues so that you’re prepared no matter what happens.
If you need help making sense of your data and looking for Fair Lending trends that could prove problematic, give Ncontracts a call.