Indirect lenders likely to require fair lending verification from dealers
Lending investigations are alive and well at the state and federal level, as a recent consent order from the Consumer Financial Protection Bureau (CFPB) against a bank and one of its non-bank partners for violations of Truth-in-Lending, the Dodd-Frank Wall Street Reform and Consumer Protection Acts resulted in about $6.5 million being returned to military members.
With powersports dealership lending compliance also an ongoing concern, Wolters Kluwer Financial Services has launched fair lending training aimed at ensuring that powersports dealers remain ahead of the compliance curve.
The Wolters Kluwer Financial Services training session “Fair Lending: Understand the Risks, Protect Your Business — Training for Dealers” will feature an agenda that includes:
• What is the CFPB and why dealers should care
• Fair lending focus in indirect lending
• Regulatory scheme: ECOA [Equal Credit Opportunity Act] and other requirements
• How banks and credit unions manage fair lending
• What the dealership can do: Policy, training, monitoring, exception pricing, working with lenders
The 75-minute session costs $199 and is available online or via CD. Dealers will receive a customizable fair lending policy to implement at their dealership, a standard exception document template and a 10-question test equipped with a certificate of completion to provide to lenders.
What’s the most effective method in determining the compliance level of a financing transaction?
“I was listening to a webinar recently, and one of guests put it this way: How would you feel if your mother or grandmother were involved in this transaction?” said Chip Zyvoloski, senior attorney for indirect lending at Wolters Kluwer in Minneapolis. “It’s that type of basic gut check that may need to be part of the analysis for all transactions at a dealership.”
Increased scrutiny of lending practices by the CFPB ultimately led to Wolters Kluwer’s launch of fair lending training. In particular, a guidance publication issued by the CFPB in March to indirect lenders who buy retail sales contracts with dealers has given F&I departments yet another topic to consider.
“The focus was on the practice of rate mark-ups, sharing rate mark-up compensation with dealers and the CFPB’s concern that those practices may create ECOA violations,” Zyvoloski said. “If there are violations, then the indirect lenders who are buying the paper from dealers have some liability exposure. So there were a few issues with that guidance that caused a reaction in the industry. No. 1, the indirect lenders’ reaction was that in order for the violations from a dealer’s perspective to apply to them, they have to participate in the decision to extend credit. Their view would be that they get some information from a dealer or seller, and we’ll say we’ll buy it for a certain rate, and we’ll give some discretion to have the contract come in at a greater interest rate. But this is what we’re telling you we’ll buy it for.
“But indirect lenders feel they’re not participating in the decision to extend credit on the exact terms, just ‘If it meets these general guidelines, we’ll buy it for a certain price.’ So indirect lenders are feeling they don’t have a significant responsibility to police or determine whether the seller is making decisions about rates and pricing that comply with the Equal Credit Opportunity Act. The seller is the one who is sitting across the table from the buyer and is the one making decisions about credit, so they’re in the best position to be complying — and need to comply — with ECOA.
“No. 2 is the practice of marking up the interest rate. The indirect lender says to the seller, ‘With a creditor with this score, with this purchase price, with this interest rate, we’ll buy the paper for this amount. If the interest rate is higher than that, we’re still interested, and we may share some of the increase in the interest rate with you.’ The CFPB’s concern was that setup may give the dealer a chance to violate the act by charging more for some protected groups and less for those who are not protected. That was a direct frontal attack on that longstanding business practice, and what reasonable steps would be needed to respond.”