Dealer Participation and Fair Lending

1. Dealer Participation and Fair Lending Ken Murphy Rob Cohen Duane Geck Arent Fox, LLPAuto Advisory Services, Inc. Severson & Werson, P.C.

2. Background

3. The Dodd–Frank Wall Street Reform and Consumer Protection Act • Signed into law in July 21, 2010 • Created the Consumer Finance Protection Bureau • Dealers (NADA) secured exemption from CFPB

4. The Dodd–Frank Wall Street Reform and Consumer Protection Act “[T]he Bureau may not exercise any rulemaking, supervisory, enforcement or any other authority, including any authority to order assessments, over a motor vehicle dealer that is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both.” [Dodd-Frank Act, section 1029(a)]

5. FTC Roundtable Meetings(“The Road Ahead: Selling Financing and Leasing Motor Vehicles”) • Three events in 2011 • Anecdotal recounts of abusive practices • No real data presented by consumer groups • Focus on fair lending practices (full day devoted to this topic in August)

6. Consumer Finance Protection Bureau • Unable to directly regulate dealers (mostly) • May seek to indirectly regulate through lenders

7. Consumer Finance Protection Bureau • Supervisory, rulemaking, and enforcement authority over banks performing direct or indirect auto financing with assets over $10 billion • Rulemaking authority over small banks • Rulemaking and enforcement over non-bank auto finance companies.

8. Auto Lender’s Perspective

9. Background:  Class Actions Against Auto Lenders, circa 2000-2006 • Consumers alleged that discretionary dealer “mark up” policies had a “disparate impact” on a prohibited basis (race and ethnicity). • None of the class actions went to trial or verdict, but on pleading and pre-trial motions some courts found that purchasers of retail contracts were “creditors” under ECOA.

10. Settlement of Class Actions, circa 2000-2006 • Unable to dispose of the class actions at the pleading or summary judgment stages, the auto lenders in each case ultimately settled the claims. • Settlement terms generally provided for future treatment of: - Caps on mark up in a range of 1.75% to 2.5% -Disclosures to consumers of possibility of mark up • Some of the settlements have expired; some terms of settlements have become state law.

11. CFPB Investigation • In Fall 2012, the CFPB reported that “every financial institution should establish fair lending policies, procedures and internal controls to ensure that it is operating in compliance with ECOA, and its implementing Regulation B, in all of the financial institution’s relevant lines of business.” • In February 2013, the CFPB put several auto lenders on notice of acts that it considered violations of ECOA. 

12. What is “Disparate Impact”? • As defined by CFPB:  “Disparate impact occurs when a creditor employs facially neutral policies or practices that can have an adverse effect or impact on a protected class unless it meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact.”

13. What is “Disparate Impact”? (Cont.) • As defined by Reg B:  “[A] creditor practice that is discriminatory in effect because it has a disproportionately negative impact on a prohibited basis even though the creditor has no intent to discriminate and the practice appears neutral on its face, unless the creditor practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact.”

14. The CFPB at NADA and AFSA meetings in February, 2013 • CFPB expects lenders to take “remedial action” with dealers when necessary.  • CFPB expects lenders to have a compliance program that includes the effects of their compensation system. • CFPB expects lender compliance programs to monitor compliance including potential disparate impact through regular statistical analysis of loan data for potential disparities on a prohibited class.

15. Dealer’s Perspective

16. Dealer Participation • Essential to the sale/leasing process - 70.5% of all consumers finance their cars - 18.5% lease - 11% pay cash [Source: cars.com] • Yield-spread is widely misunderstood and unfairly attacked

17. Dealer Challenges • Margin pressure • Internet/disintermediation • Pressure from consumer groups • Diverse array of transaction types • Diverse array of customer credit profiles • Consistent desking processes and procedures

18. Best Desking Practices • Full disclosure at first pencil • Have counsel review worksheets • Use rate sheets and standard participation rates; document exceptions • Lock rate at the desk, finance must get desk to sign-off prior to changing rate

19. The End Ken Murphy Rob Cohen Duane Geck kenneth.murphy@arentfox.comrob.cohen@autoadvisory.com dmg@severson.com