To the relief of motor vehicle sales finance companies active in Connecticut, Connecticut Banking Commissioner Jorge L. Perez recently issued a temporary “no action” memo1 stating that the Connecticut Department of Banking (the “Department”) will not enforce a controversial new law2 requiring sales finance companies to acquire and maintain ethnicity, race and sex information on applicants for motor vehicle retail installment sales contracts. Because the new Connecticut law potentially conflicts with the federal Equal Credit Opportunity Act (“ECOA”),3 the commissioner’s no action memo alleviates industry concerns about having to choose between violating ECOA, which could subject them to remedies including actual and punitive damages,4 or the Connecticut requirement, which could subject them to fines, imprisonment or both.5 A summary of the potential conflict and the no action memo follows.
ECOA prohibits creditors from discriminating on certain prohibited bases, including ethnicity, race and sex (among others), and, subject to a few limited exceptions, from inquiring about those characteristics of an applicant or any other person in connection with a credit transaction.6
Prior to October 1, 2018, Section 36a-547 of Connecticut’s sales finance company act required sales finance companies to collect certain information about applicants for retail installment sales contracts for the sale of a motor vehicle. The required information included the name, address, income and credit score of the applicant and any co-applicants and, “if known, the ethnicity, race and sex of such individuals.”7 Because most automobile dealers are not sales finance companies covered by the Connecticut act, they do not gather ethnicity, race and sex information, and that information therefore is not “known” to sales finance companies when they purchase retail installment sales contracts from dealers. Thus, as a practical matter, most sales finance companies have not previously faced compliance concerns in connection with the Connecticut requirement.
This changed when Connecticut enacted HB 5490, which amended Section 36a-547 to require sales finance companies to actively collect consumer ethnicity, race and sex data as a matter of course, regardless of whether this information was already “known.” As a result, sales finance companies can no longer rely on the “if known” language in superseded Section 36a-547 to avoid gathering ethnicity, race and sex information on retail installment sales contracts purchased from dealers.
Recognizing that revised Section 36a-547 appears to conflict with ECOA, the American Financial Services Association (“AFSA”), the primary trade association for the consumer credit industry, dispatched a letter to Commissioner Perez requesting that he issue a no action letter or similar relief for sales finance companies operating in Connecticut.
Commissioner Perez granted this request, issuing the no action memo on September 28, 2018. The memo states that it is “unclear” whether the ECOA prohibition on inquiring about certain applicant information conflicts with HB 5490’s requirement to affirmatively collect that information. It also states that the Department has made a formal request to the Bureau of Consumer Financial Protection (“BCFP”) for guidance as to whether HB 5490 conflicts with ECOA. According to the memo, until the Department receives guidance from the BCFP, the Department will not enforce the new requirement.
Beyond the legal conflict, HB 5490 raises practical challenges. Sales finance companies generally operate as indirect lenders. As such, they have no borrower contact when a sales contract is entered. How, then, are they to ensure that the required information is collected from the consumer? Normally, only car dealers are in a position to collect such information, as they are the entities that interact directly with consumers. However, Connecticut defines “sales finance companies” to exclude most car dealers; thus, the Connecticut law provides dealers little incentive to gather the new information.
As AFSA’s letter argues, HB 5490 also risks damaging credit markets. If sales finance companies are afraid to comply with Connecticut law for fear of violating ECOA, they may curtail their business in the state, and auto finance opportunities for consumers could dry up. Similarly, if new Section 36a-547 renders sales finance companies unable to make the representations and warranties required to securitize their contracts, they likely will curtail their business in the state, again reducing automobile financing opportunities for Connecticut consumers. As a result, legislation likely intended to protect consumers could end up jeopardizing their access to credit and, thus, their ability to purchase a vehicle.
As it stands, the quandary created by HB 5490 is on hold until the Department receives guidance from the BCFP. According to the no action memo, during this delay, the Department also will “undertake a review of the appropriate manner and form for which [the required information] shall be acquired, maintained, and reported to [the] Department.”
*This update was co-authored by Daniel Pearson. An associate in Mayer Brown’s Washington DC office, Daniel is not admitted in the District of Columbia and is practicing under the supervision of firm principals.
1 The no action memo is available here.