Compliance critical as regulators scrutinize auto pricing policies 

Increased scrutiny of pricing and underwriting practices means auto lenders should closely review their portfolios, underwriting habits and pricing policies to ensure compliance.  

The Consumer Finance Protection Bureau is focusing on discriminatory pricing of ancillary products such as guaranteed asset protection (GAP), cracking down on the permissibility of cancelation fees, calculation and timing of refunds and other disclosure issues, Ken Rojc, managing partner of the Auto Finance Group at law firm Nisen & Elliott, told Auto Finance News. 

“A number of states are in the process of reviewing and tweaking their laws on which party is responsible for providing the GAP refund upon prepayment and early termination,” he said. 

Discriminatory pricing is a growing area for regulatory examination and litigation in auto finance, Rojc said.  

Understanding underwriting 

Lenders must establish a detailed understanding of their auto portfolios and the “why” behind their credit decisioning to ensure compliance with fair lending regulations, Joann Needleman, member at law firm Clark Hill, told AFN. 

Lenders are not necessarily saying, “we’re not going to lend to women” or “we’re not going to lend to some sort of minority group,” Hill said. . More often, the problem results from lenders’ underwriting practices. 

Regulations under the Equal Credit Opportunity Act (ECOA) and circular warnings from the CFPB prohibit auto lenders from engaging in discriminatory credit practices and require lenders to provide consumers with detailed explanations as to why their applications were denied, according to a May 2022 press release from the CFPB. 

Lenders must provide a clear explanation — even if the decision was made through a credit model using “complex algorithms,” according to the release. 

Banks and non-banks in auto finance must do “the due diligence” of reflecting on their portfolio and financing decisions, Hill said. “You have to look back to see whether there has been any disparate impact.” 

Discrimination in pricing 

Examples of deceptive pricing continue to pop up, including in Massachusetts and New York, Nisen & Elliott’s Rojc said. 

In January, 26 Motors — a group of six, used-car dealerships in New York City — paid $300,000 in civil penalties for “preying on vulnerable customers” and “numerous violations” of the city’s consumer protection laws, according to a Jan. 11 press release from the city’s Department of Consumer and Worker Protection (DCWP). 

The DCWP also finalized a $1.5 million agreement with 26 Motors to provide relief to New Yorkers harmed by the dealerships’ deceptive sales practices, which included “the use of an elaborate false advertising scheme across numerous websites, overcharging consumers, selling mechanically defective vehicles and routinely failing to provide consumers with legally mandated disclosures,” according to the release. 

Five of the seven individual owners of 26 Motors were banned for five years from owning and operating a used-car dealership in the city. 

And last year, the Massachusetts Attorney General’s Office reached a $350,000 settlement with Hometown Auto Framingham following allegations that the dealership had engaged in “the unfair, deceptive and discriminatory pricing of “add-on” products sold to Black and Hispanic consumers,” according to a January 2023 press release from the attorney general’s office. 

In the settlement, Hometown Auto agreed to: 

• Train staff on implicit bias and the obligation not to discriminate when pricing products; 
• Disclose “add-on” product pricing to provide transparency on the price of any product offered to consumers; 
• Improve oversight by implementing a standardized pricing policy for “add-on” products that limits when and why staff may deviate from such prices and requires documentation and oversight for pricing deviations; and 
• Provide compliance monitoring information to the state Attorney General’s Office concerning future “add-on” product sales. 

Ensuring compliance 

Lenders and dealers can ensure compliance by implementing “a refined and sophisticated means of tracking the legislative and regulatory developments,” Rojc said.  

Being proactive includes having “a combination of both in-house and outside counsel support” to help create an understanding of what these regulations are and how they impact the lending portfolio from a disclosure standpoint in contracts, a services standpoint and engagement with third-party service providers, he said.

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