Principles regarding redlining — the practice of denying services or loans to particular people based on race or ethnicity — are expected to be applied to powersports and auto finance, particularly as the Consumer Financial Protection Bureau has honed in on redlining as one of its top fair lending priorities for this year, according to lawyers.
The CFPB released its 2017 fair lending priorities in mid-December, noting redlining as one of its main focus areas. “We will continue to evaluate whether lenders have intentionally avoided lending in minority neighborhoods,” according to the CFPB press release.
Most commonly, redlining can affect powersports lenders as it relates to the dealership location, said David Gemperle, partner at Nisen & Elliott LLC.
As a lender moves into a new area and seeks new dealer partners, it is important to look at every single dealership in that area, Gemperle told Powersports Finance. “If you are skipping some, regardless of what your reason for doing so is, then you need to take a second look and see if — to the CFPB or another regulator — it would look like you are avoiding the minority areas.”
While redlining typically shows up in mortgage lending, the principles of unintentional redlining have also been applied to vehicle finance, said Molly Calkins partner of the Consumer Financial Services Practice Group at Akerman LLP.
“Data redlining involves alternative data sources beyond traditional credit bureau histories,” Calkins told Powersports Finance. For example, some data providers collect and sell social media and even payday loan information to lenders. The trends collected from that data could be used against the consumer, and unintentional redlining can occur when that data reflects the consumer’s geography and/or ethnicity, Calkins said.
Considering the bureau accredits a vendor’s violations to the lender partner, finance providers need to scrutinize how they and their vendors gather and interpret consumer information, she said.
Additionally, reverse redlining occurs when a lender targets non-Caucasian consumers, not to deny them loans but to charge them more than a comparable Caucasian consumer, Calkins said.
The CFPB will likely scrutinize auto and powersports lenders to ensure they are not, for example, targeting African-American customers for credit on unfair terms, Calkins said. “In particular, how do vehicle lenders market subprime loans? The CFPB will take note if consumers who qualify for prime loans are offered subprime loans instead.”