Indirect Lending

The Foxdale case flags the importance of self-assessment. It is clearly not a time to use "see no evil" as a defense ploy. The bank has a clear - and active - responsibility to see any discrimination that occurs before the loan application or package arrives at the bank.

This obligation arises because when the bank makes a decision to purchase the loan, the bank is a creditor for purposes of Regulation B. By making a purchase decision, and by sharing its loan criteria with the dealer, the bank is participating in the credit decision. The definition of creditor in Regulation B grabs anyone who participates in the credit decision.

When should the bank start to worry? The bank is responsible for seeing a pattern in loans that it has purchased. The first trickle of loans coming in should not condemn the bank. However, the bank is responsible for noticing patterns that indicate that there may be - or there is - discrimination in the loans being purchased.

According to Doug Kasl, Vice President and Division Head, Federal Reserve Bank of Chicago, banks should conduct regular self-assessment to evaluate the practices of loans from dealers. Kasl recommends using the same type of analysis that examiners perform, comparing loans by specific terms and by prohibited basis. Once a year is probably not enough. The bank should self-assess frequently enough to know what is or is not going on in its loan portfolios.

It is also a good idea to maintain regular communications with dealers and remind them that the bank will comply with the technical requirements and the principles of ECOA. State clearly that the bank will not do business with entities that discriminate.

Then, make sure the dealer knows how to deliver clean loan packages to the bank. Have clear and specific criteria for lending and share these with the dealer so that they know what you expect. These criteria should enable the bank, the dealer, and the examiner to be able to identify the risk and appropriate rate for each loan applicant.

Finally, work closely enough with the lenders who work with the dealers to be sure that your lenders understand and carry out their ECOA responsibilities.

Copyright © 2000 Compliance Action. Originally appeared in Compliance Action, Vol. 4, No. 17 & 18, 1/00