Here are 12 recommendations about indirect auto lending compliance from the DOJ that you need to know, according to a recent settlement.
The US Department of Justice (DOJ) and the North Carolina Attorney General announced a consent decree with two “Buy Here Pay Here” dealerships in Charlotte, North Carolina. The regulatory attention was attracted by claims that the companies engaged in reverse redlining by targeting African American borrowers and using unfair and predatory terms.
The DOJ claimed that the two dealerships “engaged in a pattern or practice of discrimination in credit transactions on the basis of race or color in violation of the ECOA (Equal Credit Opportunity Act) and UDTPA (Unfair Deceptive Trade Practices Act), and engaged in unlawful repossession activity.”
The consent decree resolves claims that two used automobile "Buy Here, Pay Here" dealerships targeted African American customers for the extension and servicing of credit on unfair and predatory terms, without assessing the borrower’s creditworthiness (a practice referred to as “reverse redlining”).
The DOJ further claimed that the dealerships' sales prices, down payments and interest rates were disproportionately high when compared to other subprime used-auto dealers. Since the dealerships allegedly did not assess the borrowers' creditworthiness or ability-to-repay (ATR), their rates of default and repossession were disproportionately high. The dealerships allegedly also repossessed vehicles when customers were not in default.
The DOJ refers to this settlement as the “federal government’s first-ever discrimination lawsuit involving 'buy here, pay here' auto lending.”
The dealerships denied the allegations, but agreed to the Consent Decree in order to avoid the risks and burdens of costly litigation. Below we have highlighted a few of our key observations from the Consent Decree filed earlier this month.
The settlement touches on many elements of the dealership’s operations. The Consent Decree requires the dealerships to implement a number of specific practices to ensure that the terms of their loans and repossession practices are no longer unfair and predatory. Some of the highlights of the Consent Decree include the following:
1. No Targeting: Do not intentionally target African-Americans on unfair and predatory terms.
2. Written Policies: Dealers are to develop and implement written policies and procedures for collecting applications and current financial documents for all credit applicants. Policies should include requirements to assess Applicants’ income and ability to meet the payments on any vehicle purchased.
3. Payment to Income Threshold: Monthly payments should not exceed 25% of the total documented monthly net income.
4. Retention of Customer Account Information: Retain copies of all forms, information or documents obtained from or provided to the customer relating to any aspect of the credit transaction.
5. Computerized Systems: Accurately maintain the accounts of customers.
6. Disclosures: Review the following three elements of disclosures.
7. Test Drives and Inspections: Allow test drives and seek independent inspection of vehicle.
8. Pricing, Payments and Interest: There are four key elements of pricing, payment and interest to consider.
9. Servicing, Repossessions and Account Closures: Below are three considerations regarding servicing, repossessions and account closures.
10. Contracts and Repossessions: Dealership must report all retail installment sales contracts against which dealerships repossessed the vehicle.
11. Non-Discrimination: There are two important things to remember regarding discrimination.
12. Annual Training: Training on the ECOA and NCGS must be held for all employees (including acknowledgment of receipt of policies, procedures and notices).
The settlement also requires defendants to establish a $225,000 settlement fund to compensate victims of their past discriminatory and predatory lending.
Lesson 1: The DOJ remains focused on auto lending and concerns of discrimination.
“It is not only illegal, but also fundamentally wrong, to target borrowers of color for predatory loans and exploit their need for a car to do essential tasks such as getting to work,” said Acting Assistant Attorney General Vanita Gupta of the Civil Rights Division.
“Combating discrimination in all segments of the auto lending market is, and will remain, a top priority for the Civil Rights Division. I am pleased that these dealerships have agreed to reform problematic lending and servicing practices and adopt policies that promote responsible lending.”
Lesson 2: The DOJ is directly suggesting that auto dealers evaluate their practices with this settlement in mind.
"I hope that other buy here, pay here dealerships will evaluate their practices in light of this settlement,” Gupta added.
Ncontracts VIEWPOINT: The DOJ has clearly demonstrated that the ECOA has a broad and long reach. Under ECOA, it is unlawful for creditors to discriminate in any aspect of a credit transaction. The primary purpose of the ECOA is to prevent discrimination in the granting of credit by requiring firms that credit is equally available to all creditworthy applicants with fairness, impartiality and without discrimination on any prohibited basis. Borrowers’ individual credit histories and their ability to make payments should be considered with each credit transaction.
Based on our observations, the majority of financial institutions treat their clients fairly. However, in today’s regulatory environment, your compliance management systems must be able to support this business philosophy of "fairness."
We've summarized the nine steps that financial institutions should consider as they develop their auto fair lending compliance program. Just click here the document to get it instantly!
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