You have to control the dealers. Have a contract, and ensure it's monitored. You're responsible for the paper you buy. If a dealer is selling GAP insurance to select [read protected-class] borrowers and not others (high profit margin), the bank can be responsible for not monitoring.
If the dealers know more than the bank, DON'T DO IT. Have an experienced team in place before you start buying.
Similarly, if dealers are charging more mark-up or dealer reserve to some groups of borrowers than others, the bank can also be responsible.
I found it helpful to think of monitoring auto dealers just as I would monitor mortgage brokers or other third-party loan originators. You need to make sure you've got all the pieces of a robust CMS, including training, policies and procedures, monitoring and testing, and complaints.
At my old shop, we had a large indirect lending program. We built fair lending compliance into all our dealer contracts and provided dealers with annual reminders of their fair lending obligations. Dealer contracts capped dealer compensation based on loan term. We analyzed performance every quarter (underwriting outcomes, buy rates, dealer markup, and ancillary products) and let dealers know if their performance was not meeting expectations. For dealers with persistent disparities in cost of ancillary products or markup, we had a progressive corrective action program that included termination of the dealer relationship for severe persistent issues. We monitored complaints for concerns with fair lending or UDAAP.