Compliance Challenges Mar Used-Car Financing Outlook

SAN DIEGO ― The clouds of uncertainty surrounding CFPB regulations over the auto finance industry remained grey ― despite all that bright sun at the Used Car Summit here this week.

Panel after worried panel warned attendees to be ready while offering up compliance tips that some say could end up reshaping the sector. The biggest takeaway, once again: Gather, document, and bank your data.

To gain insight, I sat down with Mike Thurman, an attorney with Loeb & Loeb, a firm that’s been working to help finance companies understand where government regulators are going and where lenders should focus their compliance efforts. The answer: A big portion of the auto finance industry is likely to become subject to on-site regulatory examinations. But exactly how and what will be supervised isn’t completely clear just yet.

Nonetheless, Thurman said from what he can tell from dealings with industry is that big companies as well as small, are all over the map; some are ready, some, clearly not.

How can a company truly be prepared for questions surrounding disparate impact? Is there something odd or vague, even prejudiced in language that instructs the documentation, record-keeping or cataloging of perceived last names or genders?

It was the banking system, not the CFPB, that implemented this methodology of using proxies to make those determinations. The OCC issued the regulations and guidance back in 2009. Meanwhile, the DOJ has been pushing forth the idea of disparate impact. “It’s a very interesting situation, because the law that forwards the disparate impact theory is a different law than applies to consumer lending agreements,” Thurman said.

The consumer lending agreement falls under the Equal Credit Opportunity Act, which has different language than that which was used by the courts for the disparate impact test. There’s a real legal argument as to whether a disparate impact approach applies to the auto finance industry, he said.

Earlier this week, at a panel featuring Hudson Cook attorney Alicia Tortarolo and NAF Association Executive Director Jack Tracey, part of the discussion centered on the Township of Mount Holly (NJ) v. Mount Holly Gardens Citizens disparate impact case. The lawsuit centers on the disparate impact theory under the 1968 Fair Housing Act. Had the case made its way to the Supreme Court as slated, it would have answered the question of whether the government could sue a lender for discrimination by pointing to statistical data showing different racial outcomes without having to prove intent to discriminate. The case settled Wednesday though.

“There are reasons why the auto industry does not want to see that case settled,” Thurman said, noting that it would have been an opportunity for the Supreme Court to decide whether disparate impact applies to other statutes.

To date, the argument on behalf of the auto lending industry has been that overt discrimination is absolutely prohibited. But ECOA does not include language that includes disparate impact or a statistical violation to be used. That would be a huge defense in the event CFPB starts to bring disparate impact cases, Thurman said, adding that the CFPB and DOJ are taking “an aggressive approach.”

The regulators content that their mission is to enforce the law. If the law allows them to make an argument, then they’ll make that argument, Thurman said.