The CFPB has advised lenders supporting automobile dealers that indirect lending that permits dealers to increase interest rates and be compensated for these higher rates may violate the Equal Credit Opportunity Act (ECOA). This creates significant new legal and reputational risk related to longstanding practices in this market as well as establishing a principle that may apply in other areas where lenders permit third parties to increase interest rates and retain part of the resulting income if the rate mark-ups are found to have either disparate-treatment or disparate-impact implications for protected borrowers. At the least, indirect lenders in this sector and, perhaps, others will need to establish control procedures along lines detailed by the CFPB should they decide to continue to allow discretionary pricing by those acting on their behalf. Absent this discretion, credit pricing will likely become standardized, reducing third-party incentives but, the CFPB hopes, providing greater borrower protection. Market forces could also lead to renewed direct lending in affected sectors.
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