CFPB task force weighs in on auto lending discrimination, adverse action notices

Dealership responsibility to produce adverse action notices to consumers rejected for automotive financing and enhanced anti-discrimination protections were among approximately 100 recommendations an external task force made last week to the Consumer Financial Protection Bureau.

The CFPB charged the task force with identifying issues in existing consumer financial protection regulations and issuing guidance on how the agency can best educate consumers on credit markets and products. In its 798-page report, the four-member task force isolated key elements that consumer protection policy should focus on: the "consequences for inclusion and access" by underserved communities; avoiding harms to consumers in lieu of specifying how credit providers design and market their products; and modernizing the regulatory framework to adapt to shifting technology and consumer preference trends.

In a separate, 100-page report, the task force outlined its recommendations for the bureau, including:

• Improve research and develop policies that address the challenges of formerly incarcerated people, immigrants and people in rural communities.
• Research consumer reporting issues that arise in connection with a consumer's bankruptcy.
• Continue to increase dialogue with state regulators to bridge knowledge gaps and streamline regulation.
• Caution in restricting the use of nonfinancial alternative data.
• Clearer obligations of credit reporting agencies and credit data furnishers with respect to disputes under the Fair Credit Reporting Act.
• Periodic assessments of the accuracy and completeness of consumer credit reports.

To address auto loan pricing discrimination concerns, the task force advocated federal endorsement of industry-backed Fair Credit Compliance Programs. The National Automobile Dealers Association and the National Association of Minority Automobile Dealers jointly submitted the NADA Fair Credit Compliance Program for the task force's consideration in June.

The CFPB's past efforts to address discrimination in auto lending through enforcement actions drew ire from auto industry leaders. From 2013 through 2016, the CFPB pursued auto lenders on the basis that variances in dealership reserve — the amount retailers are compensated by lenders for arranging auto loans — caused minorities to be charged higher interest rates than their nonminority counterparts with similar credit, even if no discrimination was intended.

The consent orders the bureau issued to remedy potential discrimination, the report said, "imposed a tremendous compliance cost on the indirect auto finance industry with few tangible benefits for consumers."

While many auto dealerships voluntarily adopted the industry-approved program, more dealerships would likely sign on "if the Bureau acknowledged that compliance with the program would be one way of demonstrating compliance" with the Equal Credit Opportunity Act, the report said.

"We would end this whole concern about whether or not dealers are pricing minorities in an unfair or discriminatory way," Jean Noonan, Hudson Cook partner and task force member, told Automotive News. "If I could choose one recommendation that the bureau and the [Federal Reserve Board] would adopt, certainly for auto, that would be my top one."

Any future concerns about credit discrimination in pricing by auto dealers should be addressed through the CFPB's ECOA enforcement powers with auto dealerships under its jurisdiction, the report concludes, rather than through enforcement actions against the banks and other creditors involved in the contracts.

Regarding adverse action notices, the task force asserted the responsibility to inform consumers of the reasons they were rejected for an auto loan or lease should fall solely with the entity that rejected the consumer's credit application — the auto finance company or bank.

If a dealership customer is unable to find a financing source to purchase a customer's contract, every auto lender or bank that considered that contract and denied it must send that customer a reason why they rejected their request.

Most lenders send adverse action notices automatically, not knowing if another lender approved the customer or not, Noonan said. In the event no lender accepts the customer's contract, federal law requires the car dealership —considered original creditors under the law— also send adverse action notices to consumers detailing the reason lenders denied their credit application.

Because dealerships aren't privy to the underwriting practices of the lenders they work with, this requirement is unfair, according to Noonan.

"The dealer may not know why each lender turned the deal down, and they may have turned it down for different reasons. If they have to give adverse notice and reasons, the dealer is making a guess," Noonan said. "That's not a good policy."