WANADA dealers turn out for fair credit briefing[I]Regulatory overreach by Feds raises prospect of legal actions[/I]
WANADA dealer principals and finance and insurance directors came together last week to gain a full understanding of where the highly publicized assault on the automobile business by the newly established Consumer Finance Protection Bureau is headed with its claims that dealers discriminate against minorities in arranging credit for car buyers. The charges by CFPB, which began in earnest last year, are curious as they are troublesome. Curious, with the new regulatory agency — created pursuant to President Obamaês signature Finance Reform law — not having any direct jurisdiction over auto dealers. Troublesome, because the CFPB is working to impact the automobile business by pressuring the financial institutions it does regulate to modify their business relationships with dealers.
In raising the spectre of discrimination against classes of people protected by the civil rights laws in the application process for vehicle loans, banks working with dealers as credit arrangers are being told they will be held accountable by CFPB should the agency find discrimination by dealers. From there, banks are being told by CFPB that they can reduce their risk of car loan discrimination by going to flat fee compensation to dealers as opposed to the current industry practice of dealers rating consumer loans on the basis of credit worthiness of the applicant.
Beyond the problem to dealers of their banking partners going to flat fees is the fall-out of dealers being subjected to regulatory reprisals from other law enforcement agencies, along with the prospect of costly lawsuits from plaintiffsê lawyers alleging civil rights law violations.
With this forming the backdrop of auto dealer industry concern, WANADA organized a panel of authoritative presenters to brief dealer members: Chris Stinebert, CEO, American Financial Services Association, the advocate organization for the consumer credit industry; Paul Metrey, NADA legal group; and Mike Charapp, WANADAês government relations advisor and renowned dealer lawyer with Charapp and Weiss.
Independent, autonomous agency
Chris Stinebert of AFSA — who is also chairman of AWARE, Americans Well-informed on Auto Retailing Economics — launched the briefing with a contextual presentation on the unprecedented, extensive and unaccountable powers of Obamaês CFPB. Unlike other federal agencies, CFPB is run by one person, who is nominated for a five-year term. Its funding comes from a percent of the Federal Reserve budget rather than from annual appropriations, like other agencies. That makes the CFPB an independent, autonomous agency, Stinebert said, and enormously powerful.
President Obama named Richard Cordray as CFPB director in a recess appointment. The Republicans in Congress eventually approved his five-year appointment with some conditions, one of which was that auto dealers would be exempt from the agencyês jurisdiction. But Richard Hackett, who oversaw installment lending markets at the CFPB and has since resigned, said in a private meeting that the agency would reach dealers through lenders, according to Stinebert.
The point of contention is dealer reserve (which the government calls dealer markup). The CFPB looked at the difference between the markup rate and the contracted rate to see if there was evidence of disparate impact, unintentional racial discrimination resulting from a lenderês apparently neutral policies.
In its March 2013 guidance on auto lending, the CFPB advised lenders either to look at their portfolio and monitor dealers for discriminatory practices or to use flat fees for all finance deals. Earlier this year, Ally Bank and the Justice Department settled a charge of discrimination for $98 million.
One regional bank in the Midwest has gone to flat fees. Nobody has followed, Stinebert said, because lenders think the current system works. And flat fees, indeed, might make discrimination worse.
CFPB pushes lenders to monitor dealer practices
But the CFPB is still pushing for lenders to examine their portfolios in other words, to examine the practices of their dealers even if thereês no discrimination, said Stinebert.
NADA panelist Paul Metrey, with lawyerly understatement, said the CFPB has created a very unsettled situation. After much research and several meetings with the Justice Department, NADA has created a Fair Credit Compliance Policy and Program, available here. Panelist Mike Charapp praised Metrey and NADA for developing a approach dealers can implement in their F&I operations to effectively check specious claims of discrimination as the cause for less desirable credit offers to certain car consumers as opposed to the real basis, which is credit worthiness.
As long as dealer staff make their lending decisions based on a business case, said Metrey, they are legal. But thatês not enough to protect yourself. Every finance decision must be documented and filed.
Banks are required to monitor dealer contracts, and dealers must be able to explain pricing differentials, Metrey said.
Every dealership must choose its own standard dealer participation rate (dealer reserve) and apply it consistently. But seven exceptions are allowed. Under the NADA policy, dealer staff must record the reason for the pricing deviation for every finance deal. The exceptions are:
1. Dealer reserve is limited by the finance source.
2. The customer has a monthly payment constraint (specify amount).
3. If the customer has a better offer from another lender, the dealership may offer a rate below the storeês standard rate. Dealership staff must record the name and rate of the other lender.
4. A special promotion is offered to all customers on the same terms.
5. The customer qualifies for factory incentive pricing.
6. The customer qualifies for an employee incentive program.
7. The store is offering a special rate to reduce inventory.
The NADA template provides a form that dealers can use to document each finance deal.
Training is critical to the program. The trainer should explain to F&I staff the conditions that must be present for the exception to be allowed. The policy must be approved by the dealershipês Board of Directors.
Senior staff member should review all deals
All finance deals should be reviewed periodically by a more senior staff member who was not involved in the transaction.
This is an optional program, but youêre in a much better position if you adopt it, said Metrey. CFPB is looking at transactions from 2011 to 2013 with unexplained pricing differentials, even if there were no ECOA [Equal Credit Opportunity Act] violation.
It is important how dealers implement the program, said Charapp. This is very hard because weêve all done things the same way since the advent of F&I departments 40 to 50 years ago, he said. The NADA program takes a lot more work than what you do now, but itês necessary.
Charapp cautioned dealers not to think they can make up lost dealer reserve with finance products. The CFPB is already saying theyêll look at finance products, he said. So look at your process for selling products. His suggestions: (1) Use a pricing matrix. (2) Sell only products that offer value to the customer. (3) Offer customer choice by using menu pricing.Download Bulletin PDF