Additional Fair Lending requirements for CDFIs; Car Sales Rule
Last week, my wife and I celebrated 10 years of marriage by spending a few days in the Caribbean. Relaxing in paradise and enjoying the sunshine and turquoise water was an excellent mental break at the end of a long and extremely busy year. Here is a picture I took while walking the beach:
But now the vacation is over and I’ve returned to reality, let’s dive right into some compliance-related issues that the Compliance Team has considered recently:
CDFIs Face Additional Fair Lending Requirements
Credit unions serving low-income communities have the option to apply for certification as a Community Development Financial Institution (CDFI). If you’ve been following the NAFCU Today, then you’ve likely heard about how the CDFI certification application entered a “black out” period in October 2022, in which no institutions could submit new applications for certification. The U.S. Treasury Department (which oversees the CDFI Fund) finally released the updated application earlier this month, noting that credit unions can begin using it today (December 20, 2023).
Recently, a CDFI-certified credit union reached out to NAFCU to ask about compliance with Title VI of the Civil Rights Act and Section 504 of the Rehabilitation Act. If you haven’t heard much about these laws, that’s not surprising, as they’re not discussed in fair lending guidance from the National Credit Union Administration (NCUA), the Consumer Financial Protection Bureau (CFPB) or other regulatory agencies. Generally speaking, Title VI and Section 504 apply to certain programs that have received federal funds or financial assistance. Title VI prohibits discrimination in those programs on the basis of race, color or national origin; whereas section 504 prohibits discrimination in those programs based on disability. Often, these laws actually apply to federal agencies themselves – for example, Part 794 of the NCUA regulations discusses how the agency will comply with section 504 by not discriminating against any handicapped persons in any program or service conducted by the agency. The CFPB has similar regulations governing its own conduct in Part 1072 of their regulations.
While the laws described above tend to apply to government agencies, it is not uncommon for other entities or institutions to be covered by these laws as a result of receiving a federal grant or other funds. For example, section 22.4(b) of the Treasury regulations lists conduct that is prohibited for recipients treasury funds or assistance. Thus, CDFIs may be required to comply with these laws by virtue of applying for and receiving the CDFI certification. For example, this CDFI Fund webpage states that CDFIs, as recipients or potential recipients of federal financial assistance, must complete an annual Title VI worksheet. Additionally, CDFIs may be required to notify their members of the nondiscrimination requirements, which can be accomplished by using this poster on the CDFI fund webpage. Notably, these laws and requirements may cover activity beyond the lending context and thus may extend antidiscrimination requirements to other aspects of a credit union’s operations. CDFI credit unions may want to review the documents they’ve received from Treasury, as they may describe the expectations for how the credit union will comply with Title VI and Section 504.
FTC Finalizes Car Sales Rule
Last week, the Federal Trade Commission (FTC) issued a final rule relating to motor vehicle sales (the “Car Sales Rule”). This finale rule is over 300 pages long. Notably, the rule applies to “covered motor vehicle dealers” and thus applies to auto dealerships and does not apply directly to credit unions. However, the rule may affect auto dealers that participate in indirect lending relationships with credit unions and may be of particular interest to state-chartered credit unions within the FTC’s jurisdiction.
This rule prohibits auto dealers from making any misrepresentation – express or implied – regarding the following (not an exhaustive list):
- The costs or terms of… financing… a Vehicle.
- Any costs, limitation, benefit, or any other aspect of an Add-on Product or Service
- Any information on or about a consumer’s application for financing.
- Keeping cash down payments or trade-in Vehicles, charging fees, or initiating legal process or any action if a transaction is not finalized or if the consumer does not wish to engage in a transaction.
- Whether or when a Dealer will pay off some or all of the financing or lease on a consumer’s trade-in Vehicle.
- Whether the Dealer or any of the Dealer’s personnel or products or services is or was affiliated with, endorsed or approved by, or otherwise associated with the United States government or any Federal, State, or local government agency, unit, or department, including the United States Department of Defense or its Military Departments.
- Whether, or under what circumstances, a Vehicle may be repossessed.
Some credit unions have expressed concerns about misrepresentations involving dealers’ refusal to accept outside financing to purchase a vehicle, including, for example, a consumer being told that they could not use outside financing, that they would not receive a lower interest rate from an outside financial institution, or that a particular interest rate was the best rate the consumer can get. According to the rule, section 463.3(a), “which prohibits dealers from misrepresenting the cost or terms of financing a vehicle, covers these types of misrepresentations regarding financing, including the availability of outside or ‘indirect’ financing terms, or the costs of such financing as compared to those of any dealer-provided financing.”
The rule also requires dealers to disclose (if true) that an add-on product is not required and that the purchaser can buy the vehicle without the add-on product. The rule also requires dealers to make certain disclosures when comparing monthly payments.
Importantly, the rule also prohibits dealers from charging for add-on products or services if “consumer would not benefit from such an Add-on Product or Service.” Notably, the regulation specifically mentions GAP coverage, and states that a dealer may not charge for GAP “if the consumer’s Vehicle or neighborhood is excluded from coverage or the loan-to-value ratio would result in the consumer not benefiting financially from the product or service.” The rule also requires a dealer to obtain the consumer’s “express, informed consent” before charging the consumer for any item.
Credit unions may want to consider how these new requirements for their indirect lending arrangements may affect the loans they make through those partnerships.
Stay tuned to the NAFCU Compliance Blog for more updates to regulatory compliance requirements as they develop.
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About the Author
Nick St. John, was named Director of Regulatory Compliance in August 2022. In this role, Nick helps credit unions with a variety of compliance issues.