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While the economy certainly isn’t humming along, we have seen an uptick in auto lending.
Through April 2012, auto lending has been positive overall on an annualized basis for the first time since 2005, driven by used car lending. New car lending is still down, but improving, according to CUNA Mutual Group and CUNA’s economics and statistics department.
Given these hopeful economic signs, this is a great opportunity to review compliance issues related to auto lending. Making this discussion a little more complex is that most credit union auto loan portfolios are broken down into direct and indirect loans.
Let’s look at each of these loan types.
Direct loans come in two varieties:
1. The member contacts the credit union directly to finance a car purchase. There’s some communication between the dealer and the credit union, but only to obtain security information, loan amount, and other information to close the loan.
2. The credit union and the dealer have an arrangement whereby the dealer provides opportunities to the credit union to make auto-secured loans.
Likely, there may be other lenders “bidding” on the loan. The closing occurs at the dealer, but the loan is written on credit union loan papers.
For the first type of transaction, the compliance issues are relatively straightforward. Basic rules regarding the Truth-in-Lending Act (TILA), Equal Credit Opportunity Act (ECOA), and state lending laws will apply.
The second type of transaction involves these compliance issues and two others:
- The dealer may be your agent. You should have solid due diligence and a strong hold-harmless agreement with the dealer.
- The holder in due course rule will likely apply. Make sure you have appropriate documents that provide for the holder in due course rule.
Let’s define an indirect loan as one in which a credit union purchases a loan from the initial lender, which is often the auto dealer.
These loans often are written on a document called a retail installment contract (RIC). This includes not only details of the loan transaction, but also the purchase agreement between the dealer and the borrower/purchaser.
All of the compliance issues with direct loans also apply to indirect loans. In other words, TILA, ECOA, state lending laws, agency law, and holder in due course may be issues.
Credit unions need to be aware of additional risks with indirect lending:
- When buying a RIC, TILA liability may still apply, especially for obvious violations. Credit unions will need processes in place to review documents for obvious violations.
- Regulators and trial attorneys are scrutinizing dealer compensation programs that involve marking up interest rates for possible violations of ECOA’s disparate impact test for lending discrimination.
These compensation programs need a thorough review and ongoing due diligence to lessen the possibility of ECOA problems.
It’s a great time to review your auto-secured lending programs. Direct and indirect lending have similar compliance issues, but they’re not the same. They require different policies, processes, documents, and review.