The Smart Compliance Blog

It has been estimated that there were 15.7 million consumer auto loans originations in 2012.  Auto loans are the third largest source of outstanding household debt (after mortgages and student loans) with over $783 billion in outstanding loans in 2012.  It was simply a matter of time before the CFPB would focus on this huge market.  Accordingly, on March 21st, the Consumer Financial Protection Bureau (CFPB) issued guidance on fair lending practices to indirect auto lenders (e.g. Banks and Credit Unions).  The CFPB’s bulletin explains that certain lenders that offer auto loans through dealerships are responsible for unlawful, discriminatory pricing.  The CFPB’s bulletin provides guidance to indirect auto lenders on how to address fair lending risk.

The board of directors and senior management are responsible for managing activities conducted through third-party relationships, and identifying and controlling the risks arising from such relationships, to the same extent as if the activity were handled within the institution. Financial Institutions are expected to have clearly defined systems of risk management controls built into the management system including controls over activities conducted by affiliates and third-parties. The more significant the third-party service relationship (i.e. performs critical functions, material impact on revenues, large number of consumers, etc.), the more important it is that the institution conduct regular reviews of the adequacy of its oversight and controls over third-party relationships. Examiners will evaluate all applicable third-party relationships as though the activities were performed by the institution itself.

Last week, the Non-Discrimination Working Group of the Financial Fraud Enforcement Task Force (created in 2009) gathered to provide the industry an update on “Fair Lending Hot Topics.”  Representatives from Department of Justice, FDIC, CFPB, NCUA, HUD, OCC and the Federal Reserve Board participated.  The presentation ranged from the 2012 Fair Lending settlements to Fair Lending Risk Assessments and Compliance Management.  The presentation was a great reminder of the fundamentals associated with Fair Lending.

An old compliance cliché regarding third-party relationships is “them are us.”  In other words, when it comes to Fair Lending compliance, it is wise to follow the regulator's guidance and assume responsibility for third-parties, if they are involved in the credit and pricing decision.  The actual legal requirements, regarding third-parties, are complicated and unclear.  However, according to the Interagency Fair Lending Exam procedures, your bank “may be in violation if it participates in transactions in which it knew or reasonably ought to have known other parties were discriminating.”  In other words, the bank regulators encourage financial institutions to proactively manage the third-party fair lending risk.  As part of your financial institution’s own lending operations, you should understand any dealings the financial institution has with affiliated and non-affiliated brokers and other third party lenders.