State and federal regulators — including the Consumer Financial Protection Bureau (CFPB) and the New York State Department of Financial Services (DFS) — are looking to lenders’ portfolios to indirectly monitor disparate impact at auto dealerships.
Disparate impact in the automotive finance space refers to intentional or unintentional discrimination that requires business justification for why protected groups are being turned down or paying higher rates, Jean Noonan, a partner at Hudson Cook law firm, told Auto Finance News. “If a dealer is consistently charging African American or Latino people more than white non-Hispanic people then they have some explaining to do.”
In a recent investigation by the DFS, for example, two banks were penalized for allowing discriminatory dealer markups. Saratoga Springs, N.Y.-based Adirondack Trust Company was fined on June 29, after it was discovered that the bank’s Black, Asian and Hispanic buyers paid significantly higher rates than non-Hispanic whites. Meanwhile, Elmira, N.Y.-based Chemung Canal Trust Company was also fined in June because its Hispanic borrowers paid higher charges than non-Hispanic white borrowers. Adirondack Trust will pay $275,000 to the state of New York and $50,000 to community development organizations while Chemung Canal will pay $350,000 to the state.
Although dealers determine pricing decisions on a contract-by-contract basis, the CFPB looked to lender portfolios to determine any discriminatory markups, according to a Hudson Cook legal brief. Legitimate reasons include beating a competitor’s rate and manufacturer incentives that are part of the contract.
Different groups of minorities can have varying average markups within a lender’s portfolio, however, “if that difference is 10 basis points or more, we’re going to call that discrimination,” Noonan said.
Lenders should urge their dealer partners to keep a record of business justifications for why certain buyers had higher markups than others to protect themselves from inaccurate allegations of discrimination.
To avoid discrimination accusations and costly lawsuits, dealers can adopt the Fair Credit Compliance Policy & Program released in 2014 by the National Automobile Dealers Association, the American International Automobile Dealers Association and the National Association of Minority Automobile Dealers.
The program applies to intentional and unintentional disparate impact discrimination and strengthens dealers’ efforts to comply with fair credit laws, according to the NADA. Under the program, dealerships establish a pre-set standard dealer participation rate and only deviate from the annual percentage rate (APR) if an allowable business reason exists.
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Source : AutoFinanceNews
