On February 10, the Department of Justice and the North Carolina Attorney General filed a consent decree to settle claims that a Charlotte-area “buy here pay here” dealer engaged in intentionally discriminatory “reverse redlining” practices. The regulators alleged that the defendants specifically targeted African-American customers and imposed onerous credit terms upon them without regard to any objective measures of creditworthiness.
Defendants are required under the consent decree to pay a monetary penalty and submit to an injunction, but of particular note were the reforms the consent decree imposes. These reforms include implementing written policies and guidelines that impose objective criteria for assessing creditworthiness and that prohibit employees from deviating from such objective criteria. The defendants also are prohibited from employing any financing terms that would require a customer to make total monthly payments in excess of 25% of the customer’s documented monthly income.
Other reforms imposed on the defendants shed light on what appear to be particular points of interest for regulators that may transcend cases of intentional discrimination. These include:
- Requiring that written disclosure be made to all customers who purchase vehicles with a GPS or automatic shut-off device, which are becoming increasingly popular as an easier way to locate vehicles for repossession.
- Requiring that a notice be affixed to each vehicle, informing the customer of the vehicle’s mileage, year, make, model, sales price, and required down payment, as well as that defendants provide a CARFAX® or similar report on the vehicle.
- Encouraging customers to test drive vehicles and take them to independent mechanics for pre-purchase inspection.
- Refunding 30% of the down payment if a vehicle is repossessed within 45 days of purchase.
- Providing documentation to regulators on all repossessions if, in any six month period, the rate of repossession exceeds 35% of active retail installment sales contracts.
- Posting non-discrimination notices, requiring that all customers sign a similar notice, and requiring yearly Equal Credit Opportunity Act training for all employees involved in origination, processing, underwriting, or servicing.
The consent decree also requires ongoing compliance monitoring by the regulators, including reports documenting all compliance efforts every six months.
The reform and compliance monitoring terms of the consent decree are part of a trend by federal regulators to focus not only on the terms of credit at origination, but also on servicing and collection. The consent’s decree’s detailed treatment of repossessions corresponds with the Consumer Financial Protection Bureau’s recent settlement with another buy here pay here dealer, DriveTime Automotive, which we reported on here. As we explained, the DriveTime settlement primarily was focused on post-origination credit reporting, debt collection practices, and compliance with laws addressing telephone calls to consumers.
The terms here regarding notice to customers about GPS tracking, repossessions occurring soon after purchase, and volume of repossessions in proportion to overall sales also demonstrate regulators’ focus on what they consider “predatory” subprime lending, as we have previously reported on here. Lenders should carefully review their repossession practices and their disclosures to consumers about repossession. Servicing and collection practices will continue to be a focus for regulators going forward.