Fair Lending Developments

The Department of Justice never seems to sleep. Its attorneys are even now developing cases that will test new legal theories under the fair lending laws. A current theory under investigation is whether loan officers (or car salesmen) are negotiating prices and rates in ways that may discriminate against certain groups. These lender/seller practices may have a disparate impact on certain population groups or may more directly discriminate by seeing certain customers as less able negotiators.

There are two aspects of the cost. First, the dealer negotiates a sale price with each customer. If the dealer negotiates higher prices for minorities than for non-minorities or for women than for men, there may be discrimination. This is a serious concern if the dealer, expecting to get a better price from certain buyers, quotes a higher price to begin negotiations.

Then, when the price is negotiated, the credit rate negotiations begin. An analysis of credit pricing to identify any discrimination must account for several variables including the qualifications of the applicant, the amount of credit, the age or condition of the car, and other factors which measure the risk of the loan.

Obviously, it is not a simple process to evaluate whether discrimination occurs. However, it is important to scrutinize your bank's pricing policies and actual practices as a part of any fair lending audit.

ACTION STEPS

Review your bank's loan portfolio to determine what loan products may be affected by negotiated rates and negotiated pricing.
Alert your staff to the current concerns. Call their attention to any groups that could be considered victims of this practice.
Interview loan officers to learn how they negotiate rates.
Review your bank's compensation system to determine the extent to which loan officers may be motivated to negotiate above-market rates.
Audit samples from each portfolio to measure and compare the cost of credit extended to customers by group or prohibited basis.
Review loan files to evaluate whether rates are set fairly. Conduct an analysis for each loan officer's activity.