NADA Dealer Program Seeks to Reduce Potential CFPB Charges

A dealer compensation plan unveiled this past January by the National Automobile Dealers Association would have dealers establish a standard wholesale buy-rate markup amount for all customers to avoid disparate impact discrimination.

The Fair Credit Compliance Policy & Program would establish a preset amount of compensation included in credit offers to every customer. Dealers would only offer discounts based on factors that can affect finance rates, including a customer’s monthly budget constraints or incentive programs, among others.

Dealers would be instructed to document any deviation from the preset compensation on a template form in the NADA program.  That step is designed to help them document and respond to inquiries from their lenders about their pricing practices.

The ultimate goal of the Fair Credit Compliance Policy & Program is to reduce the risk of potential disparate impact discrimination charges from the Consumer Financial Protection Bureau.

Seven exceptions ― the same ones used in Department of Justice discriminatory lending settlements with a pair of Philadelphia dealerships in 2007 ― could justify lowering, but not raising, the markup rate. One of the factors is to meet or beat a competitor’s rate.

The Center for Responsible Lending, a consumer watchdog group, is wary of the plan, saying that the proposed changes will fall short. They say any system where a dealer has discretion over interest rates is likely to lead to discriminatory impact.

A January CRL survey of more than 900 car buyers found that African Americans and Latinos attempt to negotiate loan pricing more often than whites, yet white car buyers ― even those who didn’t haggle ― reported lower interest rates. The report charged that the disparities “appeared even after controlling for risk factors such as credit score and loan-to-value ratio, as well as loan characteristics, neighborhood demographics, and geography.”

CRL has said the NADA program fails to solve the bigger issue since it still allows dealers to influence interest rates.

VIABLE PROPOSAL?

But supporters of the NADA plan dispute the CRL findings, saying the NADA plan goes a long way toward meeting the concerns raised by the CFPB. Supporters have called NADA’s proposal viable, saying the Department of Justice effectively endorsed the proposal as a way to manage the disparate impact risk in discretionary pricing at the CFPB Auto Finance Forum in November 2013.

The NADA proposal focuses on standard participation rates, meaning that essentially every dealer gets the same rate. NADA says it’s similar to when a consumer walks into a store and buys a pack of gum. The same profit the store makes on Consumer A, it will also make from Consumer B.

NADA has said it believes its solution deals with the problems of unintentional discrimination. The group says it’s not questioning whether there’s discrimination, but is asking for proof.

Critics say CFPB’s “disparate impact” theory under the Equal Credit Opportunity Act is questionable because the plain language of ECOA does not support such a theory, it only supports “disparate treatment,” which is intentional discrimination.

Supporters of the NADA plan say the program would be successful in alleviating those concerns. They say if the compensation plan were implemented, customers will get the same markup of the wholesale rate unless one of the seven exceptions that have been approved by the Justice Department is present.

-Cody Lyon

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