On October 12, 2016, the DCU released Bulletin B-16-18, Indirect Lending and Credit Tier Exceptions. The Bulletin includes credit risk concerns and fair lending risks.
The Bulletin addresses concerns with indirect lending procedures and practices which allow underwriters to bump a vehicle loan applicant to a higher credit tier and interest rate that is more favorable to the applicant when the the dealer provides a credit report that contains a higher credit score than the one obtained by the credit union.
Credit Risk Concerns – Credit unions that permit these tier rate exceptions must determine if this practice is in accordance with the board’s lending policies and the credit union’s risk and pricing models. Credit unions should perform regular audits of indirect lending programs and pay close attention to trends in LTV, general loan exceptions, and concentrations of exceptions to any particular dealer.
Fair Lending Risks – If tier bumps are requested and approved arbitrarily, certain applicants receive the benefit of preferential pricing while others do not. Procedures will allow dealers to initiate requests for tier bumps will significantly raise the risk of disparate impact under the Equal Credit Opportunity Act, as dealers have discretion to determine which applicants should be considered for a tier bump.
The Bulletin also includes a list of items that should be included in the credit union’s fair lending compliance management program, which includes:
- an up-to-date fair lending policy statement;
- regular fair lending training for all employees involved with any aspect of the institution’s credit transactions, as well as all officers and Board members;
- ongoing monitoring for compliance with fair lending policies and procedures;
- ongoing monitoring for compliance with other policies and procedures that are intended to reduce fair lending risk (such as controls on dealer discretion);
- review of lending policies for potential fair lending violations, including potential disparate impact;
- depending on the size and complexity of the financial institution, regular analysis of loan data in all product areas for potential disparities on a prohibited basis in pricing, underwriting, or other aspects of the credit transaction;
- regular assessment of the marketing of loan products; and
- meaningful oversight of fair lending compliance by management and the financial institution’s board of directors
