Independent Banker - July 2018 - 34

PORTFOLIO
Keeping third-party
lenders in line
Compliance
How to maintain quality
and compliance when your
loan makers are outside the bank. By Mary
Thorson Wright
hen a community bank lends through
third parties, mainly car dealerships, it
owns the responsibility for compliance practices.
This installment of our compliance management
series looks at indirect lending compliance. What
are the keys to success in this practice, and how
can community banks manage it effectively?
A community bank may develop an indirect
automobile lending program to grow its loan
portfolio by establishing relationships with
automobile dealers. But if this program is not
managed carefully, the bank's risk is heightened,
and it can result in substantial financial
adversity and regulatory scrutiny. Regulators
expect banks to address indirect lending risks in
four areas: dealer management, consumer contract
underwriting, consumer compliance and
management oversight.
The bank's oversight of indirect lenders
(dealers) should include all applicable technical
consumer compliance requirements. These
include accuracy and completeness of disclosures
34 Q ICBA Independent Banker Q July 2018
W
and calculations; mitigation of unfair or deceptive
acts or practices; consistency of terms and
conditions; and sufficient file documentation to
evidence compliance.
First and foremost, bank regulators view indirect
lending as fertile ground for fair lending
compliance problems, including disparate treatment
on any one of the prohibited bases, and
discriminatory pricing, fees and dealer markups.
Because dealer credit applications generally
do not contain information about the race or
national origin of the applicant, the federal bank
regulatory agencies may assess discrimination by
assigning race and national origin probabilities
to applicants based on geography- and namebased
probabilities calculated using U.S. Census
Bureau data. That method can lead to inconclusive
results, at best.
Under scrutiny
For community banks, controlling and
monitoring fair lending practices and identifying
and addressing disparities across dealers present
a challenge. Instead of the community bank's
employees interviewing loan applicants, collecting
financial information and documenting the
credit file, the process is conducted by dealership

Independent Banker - July 2018

Table of Contents for the Digital Edition of Independent Banker - July 2018

Table of Contents
Independent Banker - July 2018 - Intro
Independent Banker - July 2018 - Cover1
Independent Banker - July 2018 - Cover2
Independent Banker - July 2018 - Table of Contents
Independent Banker - July 2018 - 2
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