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When Indirect Lending Becomes a Direct Risk for Your Bank

By: Jeff Robb and Melissa Ingle

When shopping for a new car, most people research the vehicle’s safety features, performance, overall comfort and cost. However, some consumers are so focused on the monthly payment that they often forget to consider the financing costs. These not only include the standard application fees, but may also include a nasty little monster called “dealer mark-up.” Dealer mark-up involves the dealership, not the bank, upcharging the consumer on the buy rate the bank has offered. The fee may be split between the bank and the dealer, or the auto dealer may pocket all of it. However, it is the bank is responsible for any disparities that may arise because of the mark-up.

Seven Steps to Eliminating Indirect Lending Risk

So, if you are involved in indirect auto lending, what can you do to protect yourself? There are several steps you can take to ensure that regulators don’t come knocking. 

Step 1: Review your lending policies and procedures.

First, dust off your loan policies and procedures and read them. Is there a chance that your P&P could be construed as overtly discriminatory? No? Then, dig a little deeper. (If yes, update your P&Ps before moving on.)  Do you have any policies that could potentially provide the means for disparate impact? Keep in mind, intent is never needed to prove disparate impact—only statistical significance. Your role as a compliance professional is to always be on the lookout for ways that potentially well-laid plans could get your bank into hot water.

Step 2: Establish a fair lending training program.

It is important to set up bank-wide fair lending training for your dealers. Provide job aids to make it easy to remember exactly what the Equal Credit Opportunity Act states and how it applies to those both on the front lines and in the back rooms. Make fair lending a part of new hire training. Then, replicate this information for all of the auto dealers you do business with. As a vendor, auto dealers represent your business and their staffs should be equipped with the same fair lending materials that your team receives. Regulators do not differentiate between a vendor’s activities and your own, so hold your vendors to the same standard. It may also be beneficial to provide a liaison between your bank and each auto dealer to help answer questions, maintain communication and enforce accountability.

Step 3: Create a culture of compliance.

A bank needs support from its highest ranks as well as cooperation from the top levels of its vendors to effectively implement a compliant culture. To ensure that treatment goes further than just getting or not getting the loan, ask the following questions:

It is in those little nuances that bigger issues arise. Make sure that treating people right is interwoven into all that you do. Remember, fair lending is not about treating someone poorly, it is about treating someone else better.

Step 4: Launch a formal complaint process.

When someone is dissatisfied, how do they communicate with you? Do you make it easy for them to share their experience? If not, you’ll want to implement a strategy for listening to your customers right away. The Consumer Financial Protection Bureau launched a complaint database and has already received thousands complaints. If you won’t listen to these consumers, regulators will. Not only is it bad public relations to make it difficult for consumers to complain, but you lose the opportunity to find the holes in your bank’s daily operations and fix them in real-time.

Step 5: Conduct a fair lending risk review.

Next, it is important to know what your performance looks like today. 

All of these concerns can be immediately addressed by conducting a fair lending risk review. As all of these statistics are measurable, this is most likely where regulators will focus during an exam. You absolutely want to know the answer to every one of these questions before the regulators conduct your examination. Always be equipped to provide regulators with facts and figures before they have a chance to do their own analysis.   

Step 6: Monitor your vendors.

Hold your vendors accountable by: 1) making them analyze their data to determine if denial ratios and dealer mark-ups to prohibited basis groups are statistically significant; or 2) receiving all of their data and analyzing the results yourself.

Step 7: Continually reassess your fair lending goals and priorities.

Finally, have a plan in place to continually reassess your fair lending goals and priorities. If your fair lending risk review determines that you have a statistically significant pricing disparity among females, how will you remedy it? If you determine that one auto dealer continually prices Hispanics higher, will you drop them? If you notice that your risk appetite is far lower than what you are currently experiencing, will you consider dropping controls and instead implement a flat fee?  These are all decisions that need to have those at the very top levels of your organization engaged and prepared.

The bottom line is that fair lending is all about “treatment.” The best way to prevent indirect lending from becoming a direct threat to your bank is to treat every applicant the same by providing the best customer service and offering the same products and pricing to everyone who walks in the door.

Jeff Robb is senior consultant and VP of services and Melissa Ingle is regulatory consultant for Wolters Kluwer Financial Services. They can be reached at and

Copyright (c) July 2014. BankNews Media.