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#2259995 - 09/21/21 03:17 PM Fair Lending & Indirect Auto Loan Programs
Compliance Nut Offline
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Joined: Feb 2016
Posts: 114
Hi everyone, I am seeking feedback from bankers and Guru's alike on the topic of fair lending risk in indirect auto loan programs. Specifically, if you are a financial institution, how do you compensate your dealers (i.e., mark-up vs. flat fee)? Also, are they compensated on the sale of ancillary products (i.e., GAP insurance, A&H). If they sell ancillary products, is there a limit/cap?

I am also interested in knowing if your regulators took issue with your program and why (or what was it that they expected)?

Appreciate your help!

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Fair Lending
#2260002 - 09/21/21 04:38 PM Re: Fair Lending & Indirect Auto Loan Programs Compliance Nut
rlcarey Offline
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rlcarey
Joined: Jul 2001
Posts: 77,310
Galveston, TX
You might want to google indirect auto lending and fair lending - there is a lot info out there - such as this: https://www.natlawreview.com/articl...nders-to-resolve-fair-lending-violations
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#2260004 - 09/21/21 04:53 PM Re: Fair Lending & Indirect Auto Loan Programs Compliance Nut
Compliance Nut Offline
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Joined: Feb 2016
Posts: 114
I've done a lot of reading/research, but the problem it that there's no really solid guidance that's consistent across regulators.

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#2260018 - 09/21/21 08:00 PM Re: Fair Lending & Indirect Auto Loan Programs Compliance Nut
Rocky P Offline
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Joined: Jun 2003
Posts: 7,243
Florida
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.
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#2260023 - 09/21/21 08:39 PM Re: Fair Lending & Indirect Auto Loan Programs Rocky P
InFairness, CRCM Offline
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InFairness, CRCM
Joined: Nov 2010
Posts: 568
USA
Originally Posted by Rocky P
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.
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#2260029 - 09/21/21 09:25 PM Re: Fair Lending & Indirect Auto Loan Programs Compliance Nut
Rocky P Offline
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Joined: Jun 2003
Posts: 7,243
Florida
Thanks so much InFairness. You covered what I wanted to say, but went for brevity because using a tablet. We had a team that KNEW indirect and managed the process. Thanks
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#2260046 - 09/22/21 02:06 PM Re: Fair Lending & Indirect Auto Loan Programs InFairness, CRCM
Compliance Nut Offline
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Joined: Feb 2016
Posts: 114
Thanks for the feedback. I'm curious as to what the regulators are expecting as far as dealer compensation. For example, are they okay with paying dealers a percentage of the amount financed? What about if ancillary products are included in the amount financed? Or is a percentage of the loan amount better? Or is dealer markup okay to a certain limit (and what is the limit)?

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#2260055 - 09/22/21 03:37 PM Re: Fair Lending & Indirect Auto Loan Programs Compliance Nut
rlcarey Offline
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rlcarey
Joined: Jul 2001
Posts: 77,310
Galveston, TX
There are no standardize regulator expectations. I would suggest calling your EIC and having a conference call with them and ask them directly what their expectations might be and discuss your proposed mitigation techniques and ask for feedback. Otherwise you are operating in a vacuum. I had discussions like this with my EIC all the time on a wide variety of issues when I was heading up compliance at a bank. It served two purposes. I received valuable feedback from the regulators prior to an exam ever starting and the examination team was given a heads up that we were serious about making sure we had the proper mitigation controls in place and was not going into something blind.
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