Speed Traps Ahead: Fair Lending Issues in Indirect Auto Lending

Is your indirect auto loan program on the regulator’s fair lending “radar screen”?  Listen to this webinar and learn valuable tips to comply with the NEW regulatory requirements.

The Consumer Financial Bureau (CFPB) released a bulletin that announced “auto lenders (will be held) accountable for illegal, discriminatory markup.” For decades auto dealers have collected applicant information and used an automated system to send a deal to several indirect lenders who respond with a buy rate and a minimum interest rate for the sale. Often the lender will pay the dealer a reserve to compensate the difference between the interest income of the buy rate and the actual note rate.  

A significant fair lending exposure can occur if the lender’s policy allows the dealer to charge a higher rate than the buy rate. The ECOA makes it illegal for a creditor to discriminate in any aspect of a credit transaction. Allowing an auto dealer the discretion to mark up the interest rate paves the way for possible discriminatory practices. For instance, female applicants are often charged more than similarly qualified male applicants.

How big is the net for fair lending issues in this type of lending?  Auto loans by the number indicate:

  • $783 billion outstanding auto debt in 2012
  • 15.7 million auto loans originated in 2012
  • Auto loans are the 3rd largest household debt after mortgages and student loans


An effective indirect lending program should:

  • Impose controls on dealer markup, or potentially revise markup policies
  • Monitor and address the effects of markup policies as part of a robust fair lending compliance program
  • Control dealer mark up buy rates and fairly compensate the dealer with a process that eliminates discrimination, such as flat fees per transaction
  • Monitor complaints regarding pricing discrimination
  • Review policies, procedures, rate sheets and dealer agreements for discretion in loan pricing and provide training

What tools do regulators use to detect fair lending problems?

  • Census information based on consumer addresses to determine ethnicity and race
  • Database analysis to determine gender and ethnicity
  • Price comparison by gender, ethnicity and race to detect pricing disparities

What other tools will you receive during the webinar?

  • Federal Reserve Step-by-Step Guide to using Excel to Identify Gender and Ethnicity (August 2013)
  • Federal Reserve’s Example: Excel listing of Female and Hispanic Names (U.S. Census)
  • Federal Reserve’s Excel Hypothetical Loan Data with Lookups and Formulas 
  • Sample complaint policy and tracking form


Lenders, compliance officers, auditors, risk managers, credit officers or anyone involved in your indirect auto loan program. 


Susan Costonis, CRCM, Compliance Consulting and Training for Financial Institutions

Credit Information

Institute of Certified Bankers: Visit http://www.icbmembers.org/login.aspx for instructions regarding self-reporting. Estimated credits: 2.5 hours CRCM/CLBB


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