Recently, the New York Department of Financial Services announced two fair lending enforcement actions against banks engaged in indirect auto lending. Specifically, the DFS found that the practices among these banks “resulted in members of protected classes, namely race and/or ethnicity, paying higher interest rates than non-Hispanic white borrowers for their automobile loans, without regard to their creditworthiness.”
Further, the DFS noted that each bank permitted auto dealers to charge higher interest rates to borrowers when the dealers finalized loan terms with car purchasers in order to increase additional dealer compensation. Finally, the DFS indicated that these banks did not monitor the auto dealers to ensure that such disparities were not negatively affecting protected-class borrowers.
Indirect auto lending exists when a bank lends to a car purchaser circuitously. Often, an auto dealer will help the car purchaser facilitate a loan through its network of lenders and, once facilitated, the receiving bank processes the dealer-collected information and funds the loan.
These enforcement actions are part of a growing trend in consumer protection and fair lending- or fair banking-related matters. If your institution engages in indirect lending with auto dealers, you should contemplate the actions below in order to ensure suitable monitoring of your auto dealers and to mitigate fair lending risk.
- Does your fair lending risk assessment properly account for the risk posed by your indirect lending relationships? Given its nature, indirect lending is inherently high risk because of the way loans are originated. Your risk assessment should adequately account for such activity.
- Have you considered targeted testing and comparative file reviews over your indirect lending results with an eye toward protected-class borrowers?
- Have you leveraged data analytics where possible to drive monitoring and management reporting?
- Have you reviewed the types of information collected by your auto dealers and assessed their processes for ensuring complete and accurate information is submitted to you during the application process?
- Do you use automated lending-origination software to originate auto loans? If so, have you considered validating whether the model output is consistent with the model’s design? For instance, you might consider testing the model based on credit attributes to ensure it is accurately generating an expected annual percentage rate, etc.
RSM’s regulatory compliance practice can help you mitigate the fair lending risks posed by your indirect lending relationships before it’s too late. With experienced technical compliance professionals across various types of lending, we can help develop a fair lending risk assessment, provide outsourced comparative file analyses and validate your automated lending origination software to ensure your model is generating fair and consistent results.