Auto lending is the third largest credit market in the United States, after mortgage lending and student loans. According to the CFPB, the auto lending market totaled $783 billion in 2012 with an estimated 15.7 million new originations in 2012. With the size of the market and the number of consumers impacted, it makes logical sense that that the regulators will maintain a close eye, especially as it relates to fair lending issues. This includes both direct and indirect auto lending. Below we identify the fair lending “Trip Wires” associated with auto lending that should be observed by all financial institutions.
The Equal Credit Opportunity Act’s definition of a creditor is quite broad. Creditors include anyone who regularly participates in a credit decision, including setting the terms of the credit. The standard practices of indirect auto lenders constitute participation in a credit decision, so it's important for auto lenders to consider Fair Lending risk assessments.
Here are the 4.5 major “Trip Wires” that can lead examiners to investigate your financial institution for additional risk:
1. Complaints – Any complaints can call attention to your entire compliance management program.
- Self-Assess: Do you have an updated complaint management policy? Are your employees fully trained? Is compliance tracking centrally managing the complaints (dates, resolution, management reporting, subsequent review of root cause)?
- Bottom Line: You have to review and address complaints and investigate the root cause behind concerns of the consumer.
- Self-Assess: Do your policies and procedures allow for your loan officers, credit administrators or indirect lenders to influence the loan terms? How are you monitoring the lending activity? How are you monitoring and reporting exceptions? Are your files consistently and appropriately notated and documented?
- Bottom Line: You have to examine how your policies and procedures allow discretion within your underwriting and pricing processes.
3. Compensation – Does compensation vary based on the terms or conditions of the loan?
- Self-Assess: This area of concern is less prominent in direct lending, but should still be reviewed. However, variable compensation with indirect lenders has historically been a common practice (aka buy rates vs. dealer mark-ups).
- Bottom Line: You need to know where financial incentives may exist that are based on the price/terms of the loan.
4. Disparities – Loan data that indicates disparities on a prohibited basis (e.g. pricing disparities).
- Self Assess: With the use of proxies assigned to your consumer data, are you looking at your lending patterns on both an aggregated basis, direct channel basis, and an individual dealership basis?
- Bottom Line: If auto finance is a part of your business model, you need to be aware of the lending patterns inside your organization (e.g. direct and indirect lending).
4.5. Due Diligence – Are you examining your indirect relationships on a regular basis? We find that many lenders may conduct a review on the front-end of a new indirect relationship but do not conduct regular reviews after the relationship is established.
- Self-Assess: Do you have a policy in place that provides guidance on how indirect lending should be reviewed? Do you fully understand how the underwriting flows for each unique relationship? Do you understand what type of Fair Lending training takes place within your partners? Do you periodically analyze the actual loan data?
- Bottom Line: Do your indirect dealers acknowledge your lending philosophies and do your dealer agreements outline how business should be conducted so that similarly situated individuals are treated in the similarly?
TRUPOINT Partners can help you assess your fair lending risk when it comes to your auto lending and other credit facilities. Let us share our insights and point you in the right direction.
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