Alleged ECOA Violations and Dealerships: Will the Market Tip?
When will dealers implement compliance policies to protect their business model and give finance sources the ability to respond to the CFPB?
It’s the start of a new year, and like clockwork, the Consumer Financial Protection Bureau (CFPB), ever vigilant in self-promotion and use of press releases, announced in early February a settlement with Toyota Motor Credit Corporation (TMCC) for “alleged” violations of the Equal Credit Opportunity Act (ECOA).
We use the word alleged as the consent decree provides:
- “Toyota allegedly engaged in a pattern or practice of conduct in violation of the Equal Credit Opportunity Act . . . by permitting dealers to charge higher interest rates to consumer auto loan borrowers on the basis of race and national origin.”
- “There has been no factual finding or adjudication with respect to any matter alleged by the United States.”
- “Toyota enters this settlement solely for the purpose of avoiding contested litigation with the Department of Justice, and instead to devote its resources to providing fair and industry-leading services to its customers.”
In addition to the CFPB release, Toyota issued its own press release stating, “During their review the agencies [CFPB and DOJ] did not contend that TMCC intentionally discriminated against its customers.” Accordingly, TMCC denies any wrongdoing and notes that this voluntary agreement does not include an assessment of civil money penalties.
So what exactly caught the ire of the DOJ and CFPB?
The agencies reviewed loans from January 2011 through February 2, 2016, and alleged “significant disparities” were found, with African-American borrowers charged approximately 27 basis points (.27%) more in dealer markup than similarly situated non-Hispanic whites. Meanwhile, Asian and/or Pacific Islander borrowers were charged nearly 18 basis points (.18%) more.
To address these disparities, the CFPB turned to what is becoming a standard approach to limit and reduce dealer compensation.
Under the terms of the decree, Toyota must implement a dealer compensation policy conforming to one of three options:
- Option 1: Limit dealer discretion to 125 basis points for terms of 60 months or less, and 100 basis points with terms greater than 60 months. Toyota is not precluded from including in its compensation policies and an additional nondiscretionary component of dealer compensation consistent with applicable laws and subject to the non-objection of the CFPB. Under this option, Toyota may provide entirely nondiscretionary dealer compensation to some dealers while it provides discretionary compensation consistent with Option 1 to others, so long as all loans purchased from a particular dealer are compensated using only one of the two compensation systems.
- Option 2: Provides for the establishment of a standard dealer participation rate (within the substantially lower rate spread limits of 1.25 and 1.0) with downward deviations under authorized exceptions. As with Option 1, Toyota may provide entirely nondiscretionary dealer compensation to some dealers while it provides discretionary compensation consistent with Option 2 to others, so long as all loans purchased from a particular dealer are compensated using only one of the two compensation systems.
- Option 3: Allows for no dealer discretion and would be flat-rate compensation.
What is unclear from the decree is the difference between Options 1 and 2. Option 2 is similar to the NADA fair lending program, where the dealer establishes a standard markup rate and then documents any deviation from said rate.
The difference with Option 2 is that Toyota will establish the policy and procedure for dealers to deviate from a standard rate, and documentation the dealer must collect and maintain for each exception. This policy and procedure must then be submitted to the CFPB for approval before being implemented at the dealership level.
Given the requirements for deviation from a set markup rate under Option 2, Option 1 seemingly provides dealers with no ability to deviate from setting the contract rate at 1.25%, or 1.0% over the buy rate depending on the term.
Which way Toyota will go remains to be seen. Toyota must implement one of the three options within the later of 180 days from the effective date of the decree, or 30 days of obtaining any required non-objection from the CFPB.
The settlement is in keeping with the agency’s Auto Finance Discrimination Enforcement Action Plan, which states in part, “Through a coordinated set of enforcement actions against indirect auto lenders, we seek to eliminate discrimination in auto dealer compensation and possibly eliminate dealer markup altogether.”
This market-tipping approach is in line with the agency goal stated in the January 2013 CFPB Memo to “significantly modify and possibly eliminate markup policies by indirect auto lenders.”
The question is, when will dealers, as a general rule, implement compliance policies and procedures to protect their business model, and give finance sources the ability to respond to the CFPB and keep the market from tipping?
David R. Missimer, firstname.lastname@example.org, is general counsel for Automotive Compliance Consultants Inc. He spent 28 years in private practice as a litigator representing lenders, auto dealers, and numerous other entities and individuals. He has worked with dealership compliance issues since 2003 as co-founder of Automotive Compliance Consultants. He is a member of the National Association of Dealer Counsel, American Financial Services Association, and National Automotive Finance Association.