IBA Compliance Connection

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We are purchasing a portfolio of indirect auto loans from another bank, which permitted discretionary dealer markups for the loans’ interest rates. What due diligence do you recommend from a fair lending perspective? Could we be held liable for fair lending issues from the purchased loans? Should we perform statistical analysis on the loans before purchasing?

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We believe it would be prudent to perform a statistical analysis as part of your institution’s decision to purchase the auto loan portfolio to help assess the potential legal and reputational risks involved.

Purchased auto loans could pose fair lending risks to your institution, even though your institution did not originate the loans. The Equal Credit Opportunity Act (ECOA) defines the “creditor” of a loan to include “any assignee of an original creditor who participates in the decision to extend, renew, or continue credit.” So, for example, the Interagency Fair Lending Examination Procedures direct examiners to analyze purchased loans and “look for indications that the institution specified loans to purchase based on a prohibited factor or caused a prohibited factor to influence the origination process.”

The CFPB has been focusing on fair lending issues with auto lending for several years, and its 2013 Bulletin on indirect auto lending suggests that it would not turn a blind eye to disparities in treatment that emerge from a portfolio of purchased loans. For example, it recommends performing statistical analyses both on an institution’s entire portfolio of auto loans and separate analyses for each indirect auto lender.

For resources related to our guidance, please see:

  • Equal Credit Opportunity Act, 15 USC 1691a(e) (“The term ‘creditor’ means any person who regularly extends, renews, or continues credit; any person who regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit.”)
  • Interagency Fair Lending Examination Procedures, printed pages 3–4 (“In determining the scope of the examination for such institutions, examiners should consider whether:  . . . The portfolio includes purchased loans. If so, examiners should look for indications that the institution specified loans to purchase based on a prohibited factor or caused a prohibited factor to influence the origination process.”)
  • CFPB Bulletin 2013-02, Indirect Auto Lending and the ECOA (March 21, 2013) (A “strong fair lending compliance program would include “depending on the size and complexity of the financial institution, regular analysis of loan data in all product areas for potential disparities on a prohibited basis in pricing, underwriting, or other aspects of the credit transaction.”)
  • CFPB Bulletin 2013-02, Indirect Auto Lending and the ECOA (March 21, 2013) (“For example, indirect auto lenders that retain dealer markup and compensation policies may wish to address fair lending risks of such policies by implementing systems for monitoring and corrective action by: . . . conducting regular analyses of both dealer-specific and portfolio-wide loan pricing data for potential disparities on a prohibited basis resulting from dealer markup and compensation policies . . . and promptly remunerating affected consumers when unexplained disparities on a prohibited basis are identified either within an individual dealer’s transactions or across the indirect lender’s portfolio.”)