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Fair lending & auto loans

Question: We make auto loans through a car dealer. Usually we follow strict pricing guidelines. However, there are situations where the dealer is willing to give us recourse even though the borrower does not qualify for our guidelines. Some of these applicants are really very marginal. Do we have fair lending or predatory lending problems if we make these loans?

Answer: It depends. For fair lending purposes, you should watch what customers get this special treatment from the dealer. If the dealer is not discriminating in this respect, then neither are you. In fact you are making credit available.

The predatory lending question is not quite so straightforward. For purposes of predatory lending, if you rely entirely on the recourse agreement to solve your risk, you may be making a predatory loan. You should look carefully at the borrower's ability to repay the loan. The core definition of a predatory loan is one that the borrower is unable to repay. So before helping everyone out, make sure that the credit makes sense for the customer and that the customer can afford it. Next, be sure that your pricing - or the dealer's pricing - is fairly based on the risk presented by the customer. If you do these two core things, you should be ok.

Copyright © 2003 Compliance Action. Originally appeared in Compliance Action, Vol. 8, No. 9, 9/03

First published on 09/01/2003

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