Shaun Petersen 2020-07-24 02:13:33
Issue of Disparate Impact Rises From the Grave
How many of you developed similar quarantine habits to mine?
Maybe sleeping in a little longer, grabbing more takeout meals and, of course, streaming every conceivable show/movie from Hamilton to Cheers to a Star Wars marathon.
It was all the zombie movies in my Netflix queue that got me thinking about one of our past policy issues that has taken on its own undead lifecycle: disparate impact in indirect lending.
You might recall that in March 2013, the Consumer Financial Protection Bureau issued a guidance document addressing what it said was an increased risk of discrimination in dealer-assisted financing.
The bureau claimed compensation policies in the form of dealer markup create a significant risk that dealers and lenders will engage in pricing disparities based on race, national origin or other improper factors.
In other words, the CFPB said indirect lending leads to illegal discrimination. Perhaps not intentional discrimination, but it could create a statistical “disparate impact” between different groups in a lender’s portfolio.
That means when one examines the entirety of a lender’s portfolio and looks at interest rates given to one race as opposed to another, the statistics might show a particular race received more favorable rates than another.
The bureau’s document led to slew of furious actions by both the CFPB and the auto industry.
Treating the document more like a regulation with the force of law than guidance, the bureau initiated major enforcement actions against Ally Financial, Fifth Third Bank, American Honda Finance Corporation and other lenders. Conversely, the industry set out to rein in the CFPB and keep it from relying on what many believed to be an ill-conceived document.
After years of advocacy by NIADA and so many of its dealers and industry partners, the industry was able to convince Congress that the guidance document was in fact an improperly promulgated regulation.
That effort cumulated in the passage of Senate Joint Resolution 57, signed by President Trump in May 2018. The resolution nullified the guidance document and prevents the CFPB from implementing something similar without Congressional approval.
With that, many believed – perhaps erroneously – the issue was dead and buried. But like the zombie that bursts out of its temporary tomb, this issue is not going away.
While the CFPB has not made it a priority, another federal regulator has now signaled its intent to consider the issue – perhaps with a unique interest group pushing it along.
In last month’s UCD, we told you about a recent settlement between Federal Trade Commission and Bronx Honda. The FTC alleged Bronx Honda and its general manager told salespeople to charge higher financing markups and fees to African-American and Hispanic customers.
The FTC claimed African- American consumers were charged about $163 more in interest than similarly situated non-Hispanic white consumers, while Hispanic consumers were charged about $211 more in interest.
Those alleged misdeeds, among others, cost the dealership $1.5 million and paints the picture of a dealership gone rogue.
There is plenty to analyze in the verbiage of the order settling the case, especially given the fact it is the FTC’s first credit discrimination case against a car dealer.
But what every dealer should note is it likely won’t be the last case.
In a break from tradition when an FTC enforcement case is resolved, Rohit Chopra and Rebecca Kelly Slaughter – the two Democrats among the five FTC commissioners – issued statements indicating their desire for increased scrutiny on the auto finance industry.
Slaughter opened her statement by declaring, “The automobile financing market in the United States is profoundly broken,” and called for “farreaching structural reform” to auto sales and finance, including an FTC rule to regulate dealer markup.
Chopra urged the commission to use machine learning and other data-driven techniques to search for disparate impact in auto finance.
Both suggested the FTC should use its rulemaking authority to further fight alleged misdeeds by automobile dealerships. They each suggested enforcement actions are not sufficient.
Dealers should be aware that increased enforcement might be ahead, especially if the Democrats win the White House and become the majority among FTC commissioners.
Of course, the FTC isn’t the only interested party. Consumer advocates continue to push the issue. And there is yet another group looking to jump in.
The American Bar Association’s Section of Civil Rights and Social Justice, Section of State and Local Government Law, and Commission on Homelessness and Poverty have proposed a resolution for the ABA to urge federal, state and local governments to adopt laws and regulations “addressing discrimination in vehicle sales and financing markets” and a “flat percentage fee for dealer compensation.”
Sound familiar? Leave it to a group of lawyers to get involved.
The ABA is scheduled to vote on the proposed resolution in near future.
The ABA’s interest, coupled with the FTC’s signal of more to come, should be a warning to all: the zombie is not dead.
If you don’t have a written fair lending compliance program, do it now.
Shaun Petersen is NIADA’s senior vice president of legal and government affairs.
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