Bureau Provides Guidance on Fair Lending Practices to Indirect Auto Lenders
WASHINGTON, D.C. – Today, the Consumer Financial Protection Bureau (CFPB)
released a bulletin explaining that certain lenders that offer auto loans
through dealerships are responsible for unlawful, discriminatory pricing.
Potentially discriminatory markups in auto lending may result in tens of
millions of dollars in consumer harm each year, and the bulletin provides
guidance to indirect auto lenders within the CFPB’s jurisdiction on how to
address fair lendingrisk.

“Consumers should not have to pay more for a car loan simply based on their
race,” said CFPB Director Richard Cordray. “Today’s bulletin clarifies our
authority to pursue auto lenders whose policies harm consumers through unlawful

When consumers finance automobile purchases from an auto dealership, the dealer
often facilitates indirect financing through a third party lender. The dealer
plays a valuable role by originating the loan and finding financing sources. In
this indirect auto financing process, the lender usually provides the dealer
with an interest rate that the lender will accept for a given consumer.

Indirect auto lenders often allow the dealer to charge the consumer an interest
rate that is costlier for the consumer than the rate the lender gave the dealer.
This increase in rate is typically called “dealer markup.” The lender shares
part of the revenue from that increased interest rate with the dealer. As a
result, markups generate compensation for dealers while frequently giving them
the discretion to charge consumers different rates regardless of consumer
creditworthiness. Lender policies that provide dealers with this type of
discretion increase the risk of pricing disparities among consumers based on
race, national origin, and potentially other prohibited bases. Research
indicates that markup practices may lead to African Americans and Hispanics
being charged higher markups than other, similarly situated, white consumers.

Today’s bulletin explains how the Equal Credit Opportunity Act (ECOA) applies to
indirect auto lending. The bulletin also provides guidance for indirect auto
lenders on ways to limit fair lending risk. The ECOA makes it illegal for a
creditor to discriminate in any aspect of a credit transaction on prohibited
bases including race, color, religion, national origin, sex, marital status, and
age. The CFPB recommends that indirect auto lenders within its jurisdiction take
steps to ensure that they are operating in compliance with fair lending laws as
applied to dealer markup and compensation policies. These steps may include, but
are not limited to:

Fair Lending Attorney

Fair Lending Practices

•    Imposing controls on dealer markup, or otherwise revising
dealer markup policies
;•     Monitoring and addressing the effects of markup policies as
part of a robust fair lending compliance program; and
•     Eliminating dealer discretion to markup buy rates, and
fairly compensating dealers using a different mechanism that does not result in
discrimination, such as flat fees per transaction.