By now most compliance officers have heard about the consent order between Ally Bank, the CFPB and DOJ. In short, Ally agreed to pay a total of $98 million in fines ($18 million) and restitution ($80 million) in a disparate impact settlement of an indirect auto lending case. While several law firms and others have laid out the facts surrounding the consent order, I want to highlight what the provisions of the consent decree mean for indirect fair lending monitoring programs.
- Ally had a policy that allowed auto dealers to markup the consumer’s interest rate above the buy rate established by the bank. For 60 month or less finance periods, Ally limited the dealer mark up to 250 basis points. Deals of a longer duration or that involved clients in the lower two tiers of the company’s pricing system were limited to a 200 basis point mark up.
Take Away: CFPB/DOJ let stand the 200/250 basis point markup limits. It’s not clear if these limits are universally applicable.
- Until the regulators appeared at the door, Ally did not monitor their dealers for fair lending pricing issues.
Take Away: If an institution allows pricing flexibility at its dealers, it should monitor pricing for differential treatment at the individual dealer as well as the portfolio levels. Portfolio wide analysis is not enough. Quarterly pricing analysis at the individual dealer level is needed.
- The analysis performed by the regulators used proxies for race, gender and ethnicity. In part the proxies were based on a new proxy methodology called BISG (Bayesian Improved Surname Geocoding).
Take Away: While not the only proxy technology used by the regulators, the BISG technology is growing in importance.
- The basis point spreads between the buy rate and the consumer rate that were statistically significant (Blacks – 29 BPs, Hispanics – 20 BPs and Asians – 22 BPs) are small.
Take Away: The old “safe harbor” spreads of 50 BPs are a thing of the past. Furthermore, Banks need to identify factors that explain the difference between the consumer rate and the buy rate.
- The consent order required a Board level three man compliance committee to monitor and coordinate the Bank’s adherence to the Consent order.
Take Away: Heightened board direct involvement in these settlements is key. The Ally Board Compliance Committee and full board are required to review the submissions to the CFPB/DOJ. The Board Compliance Committee will meet at least bi-monthly to internally monitor adherence to the Consent order and twice yearly with the CFPB/DOJ.
- Ally is required to send notices to all dealers explaining ECOA and expected compliance particularly with respect to pricing in a non-discriminatory manner.
Take Away: Dealer education is becoming an important bank responsibility.
- Corrective action is necessary with respect to dealers whose pricing data indicates they are pricing differentially with respect to prohibited basis applicants.
Take Away: With respect to dealers, Banks are the fair lending enforcers. Document your dealer monitoring and education activities.
- Offended applicants must be remunerated if the monitoring analysis indicates differential treatment for a particular prohibited basis group.
Take Away: Consumer remuneration is expected.
- Ally can submit a non-discretionary dealer compensation plan and on approval from the regulators avoid many of the provisions detailed above.
Take Away: For some organizations development of a non-discretionary monitoring program may make sense.
Preiss&Associates has been performing custom fair lending analyses for more than 20 years. If you have fair lending questions, want to talk about your fair lending issues or have need for us to assist you with your fair lending program give us a call at 847-295-6881 or email us at rpreiss@preissco.com.
