ATLANTA—Get ready to dig deeper into your loan data to ensure your credit union’s lending practices are not discriminatory, cautions one analyst.
The CFPB has been cracking down on indirect auto lending—a category that can be difficult to monitor for fair lending given that dealers can be heavily involved in the pricing of loans. The Bureau has, for instance, cracked down on buy-rate financing. Buy rate, also referred to as dealer mark-up, is when the lender provides the dealer with its rates, then allows the F&I department to mark up the rate at their discretion.
The Bureau started focusing more than a year ago on the large finance companies and last year turned to some big banks as well, handing out some large fines for allegedly discriminatory lending.
CFPB Attention
Analysts are not forecasting that the CFPB will begin looking at smaller lenders in the future, something Kyle Kehoe, president of the Action business unit at CRIF Lending Solutions, said may not be too far off—and not just for auto lending. Kehoe said that focus will eventually lead all financial institution regulators to have examiners looking closely for the issue across all lending categories.
“What will be required is some sort if standard report that lenders will have to have for their auditors,” said Kehoe. “And while the focus now has been indirect auto, I do see the attention expanding across all lending in the future.”
The reports, asserted Kehoe, will verify that a lender is not engaging in making loans that are discriminatory. And he said that looking at loans individually does not provide an accurate picture of whether the lender is exhibiting a discriminatory trend in a certain race class.
“We saw this problem, and regulatory burden, as opportunity to help our clients provide reporting to their auditors on this matter,” said Kehoe, whose company provides automated loan origination solutions for FIs.
“We recently worked with one of the largest CUSOs to develop a disparate impact process and program that will create reports that financial institutions will provide to auditors to verify that their lending practices are in order,” said Kehoe.
The process has to be automated, insisted Kehoe.
“It takes developing a framework to pull data from the core system and from the loan origination system and combine that together to create the reporting mechanism to show the type of loans the FI is making, and whether the lender is engaging in any trends that may be discriminatory. This is a need that is coming,” Kehoe said.
No Manual Task
To do all of that manually would be impossible, Kehoe added.
“You have to have a good loan origination system that is automating this entire process,” said Kehoe. “You have to have all your data on how you made a loan decision, all info on your members, have the ability to pull data from your core system, and then have the logic behind that to do name matching and things like that.”
Kehoe added that this need has arisen quickly.
“I was at a conference just over a year ago for some big national indirect players who said they were concerned about this issue, and for a couple of them it quickly became a serious matter,” Kehoe said.