So, I find out the bank is offering a discount on the interest rate of the loan if you set up an AFT with our bank. So my mind immediately goes to Reg Z and variable rate disclosures, etc. but then they tell me if the person doesn't set up the AFT or cancels it at some point, they don't raise the rate. So, I'm like OK so all a customer has to do is say "Yeah, I'll set up an AFT and they get a discount?" And they say yes.

So, now I am sitting here going besides that being a very stupid thing to do, it is no longer a preferred rate, but is there something else wrong with it? I tried to say to myself it was conditioning the loan on the AFT, but it really isn't. They offer the AFT discount to every customer, so not really a fair lending issue. What am I missing? (Other than why in the world would you do this????)

Thoughts?????

My mind went to Reg E (assuming that AFT is an EFT, not sure by the terminology though).

1005.10(e)(1)
(1) Credit. No financial institution or other person may condition an extension of credit to a consumer on the consumer's repayment by preauthorized electronic fund transfers, except for credit extended under an overdraft credit plan or extended to maintain a specified minimum balance in the consumer's account. This exception does not apply to a covered separate credit feature accessible by a hybrid prepaid-credit card as defined in Regulation Z, 12 CFR 1026.61.

1005.10(e)(1)-4
4. Incentives. A creditor may offer a program with a reduced annual percentage rate or other cost-related incentive for an automatic repayment feature, provided the program with the automatic payment feature is not the only loan program offered by the creditor for the type of credit involved. Examples include:

i. Mortgages with graduated payments in which a pledged savings account is automatically debited during an initial period to supplement the monthly payments made by the borrower.

ii. Mortgage plans calling for preauthorized biweekly payments that are debited electronically to the consumer’s account and produce a lower total finance charge.

Risk management, the bank is giving away money and rewarding bad behavior.
From a Fair Lending perspective, if the bank eventually gets wise and starts increasing the rates in accordance with the terms of the note, there could be complaints that some got away for a long time, others had quick enforcement, especially if adjustments were done to a protected class borrower. If random, may be a UDAAP issue.

Hey Monster, we would still offer the product if they didn't do the AFT/EFT.
Rocky - that is the information I needed. I was just struggling getting there because it is set up currently to be offered to everyone. I am going to bring this to the Chief Risk Officer's attention and see if the she wants to do something about it.

Thank you both for your thoughts. I really appreciate being able to "think" out loud with your help!