Is the Justice Department Endorsing Lower Dealer Markup?

Compliance experts are poring over a recent consent order between the U.S. Department of Justice and Evergreen Bank, a state-chartered bank based in Oak Brook, Ill., for clues on how regulators apply the “disparate impact” theory to indirect lending and what lenders should do about it, such as adopting flat fees for dealers.

“This is the first public enforcement action since Ally,” Chicago attorney Ken Rojc told Auto Finance News in a phone interview today.

Rojc, managing partner in charge of the auto finance group for Nisen & Elliott, was referring to a December 2013 consent order among Ally Financial Inc., the DOJ, and the Consumer Financial Protection Bureau.

In the recent case, the DOJ accused Evergreen of allowing dealer discretion in marking up consumer interest rates on motorcycle loans, which, in turn, led to higher rates for minority borrowers. Under the “disparate impact” theory, which the CFPB also employs, only the higher rates matter, even if discrimination is unintentional.

The bank neither admitted nor denied wrongdoing in the consent order filed May 7, but agreed to pay $395,000 in restitution to certain African-American and Hispanic consumers. According to the complaint in the case, those minority customers paid an average $200 more than non-protected classes, over the life of the loan.

The bank makes 6,000 to 12,000 motorcycle loans per year, via 400 dealers in all 50 states, according to the consent order.

The consent order said the bank adopted a flat-fee-only policy for dealer compensation in March 2014. Flat fees were not a requirement in the consent order.

The CFPB, which was not a party to the Evergreen case, has advocated flat fees in the past as a remedy for disparate impact, along with other proposals to eliminate dealer discretion in setting rates. The flat fee idea has caused a lot of pushback from the National Automobile Dealers Association and the American Financial Services Association.

Rojc said one of the interesting aspects of the Evergreen consent order is that the DOJ gave Evergreen choices for curing its disparate impact problem that were new and different compared with the Ally consent order. For instance, according to the consent order, Evergreen could have adopted a lower ceiling for dealer markup instead of doing away altogether with dealer discretion. Evergreen could have set a ceiling of 1.3% or 1.15%, depending on the length of the loan, the order said.

In Ally’s case, the DOJ and the CFPB said Ally could either do away with dealer discretion or adopt a strict monitoring policy for loans originated at dealerships. Ally opted for monitoring.

“It’s not an outright prohibition on dealer markup,” Rojc said of the Evergreen order. The indirect lending model for motorcycles works just like indirect auto lending, so lessons learned in the Evergreen case should apply to auto finance, he added.