On December 6, during the 2022 Interagency Fair Lending Webinar, David Evans, a senior fair lending specialist with the Federal Deposit Insurance Corporation (FDIC), discussed some of the specific discrimination issues identified during FDIC examinations that were ultimately referred to the Department of Justice (DOJ) as potential fair lending violations. One area highlighted in the webinar will be very familiar to our readers — alleged disparate impact discrimination in the pricing of indirect automobile contracts. Specifically, the FDIC noted cases where banks allowed dealer discretion in the pricing of retail installment contracts, a common practice in indirect automobile finance. According to the FDIC, this discretion led to borrowers being priced differently on a prohibited basis (i.e., sex or national origin): “If there is unmonitored discretion, we could have a fair lending risk in that borrowers might be priced differently on a prohibited basis.”
Mr. Evans went on to describe how the FDIC determines whether disparate impact discrimination has occurred. Once the FDIC obtains the bank’s pricing criteria, its economists create a statistical model to determine whether there are any statistically significant differences on a prohibited basis. The economists typically evaluate the buy rate (the rate at which the bank was willing to purchase the borrowers’ contract from the dealer), the markup allowed, and the contract rate (buy rate plus markup). According to the FDIC, in the referred cases there was a link to the discretion in setting either the markup or the buy rate and ultimately the borrowers being charged a higher rate on a prohibited basis. After controlling for the bank’s pricing criteria, the FDIC concluded that those differences were statistically significant, meaning that the difference was likely not due to chance.
As our readers will recall, this is not the first time a federal agency pursued automobile finance companies under a disparate impact theory. In 2013, the Consumer Financial Protection Bureau (CFPB) issued guidance to automobile finance companies suggesting that “dealer markups” could be illegal under the Equal Credit Opportunity Act (ECOA) if they result in higher interest rates for protected classes. But, in 2018, Congress exercised its oversight authority under the Congressional Review Act to overturn the CFPB’s disparate impact guidance by disapproving the 2013 guidance. In our view, this Congressional action acts as a disapproval of the disparate impact theory enunciated in the 2013 guidance, which is the same as the legal theory now being utilized by the FDIC to refer banks to the DOJ for alleged ECOA violations. We believe the FDIC’s reliance on an interpretation of ECOA that Congress has disapproved makes its legal position on this issue vulnerable to challenge (in addition to the other legal and factual flaws inherent in this theory of liability, which are many).
Nevertheless, FDIC-regulated banks with indirect automobile finance operations should be aware of the agency’s position on this issue. Troutman Pepper will continue to monitor the FDIC and other federal agencies’ guidance on dealer finance charge issues.