No sure OK for reserve guidelines

Dealers face decision, await CFPB guidance

After speaking at an auto-financing conference, Patrice Ficklin, left, greets moderator Chris Stinebert before answering questions about steps lenders and dealers can take to avoid running afoul of the bureau. Photo credit: EPNAC/JULES CLIFFORD

NEW ORLEANS -- The National Automobile Dealers Association is going out on a limb by recommending ways for dealerships to ward off discrimination charges from the Consumer Financial Protection Bureau.

The CFPB hasn't said whether NADA's recommended actions will suffice in the eyes of the agency but said Friday that it would review the proposals.

The short version of the NADA recommendations is that dealerships should adopt a percentage ceiling on dealer reserve, never exceed it and document a legitimate business reason every time they offer a discount below that ceiling.

The approach is modeled after a 2007 settlement in which a couple of Philadelphia-area dealerships settled lending discrimination charges filed by the U.S. Department of Justice.

The NADA recommendations, unveiled Friday, prior to the NADA annual convention here, include a list of seven suggested reasons which, in NADA's opinion, a dealership could cite as legitimate reasons for making an exception its policy -- for instance, to meet or beat a competing offer.

There also are recommendations for setting up a compliance program at a dealership, appointing who's responsible for it, suggested templates for documents and more. NADA is expected to distribute the "NADA Fair Credit Compliance Policy & Program" booklet to its members soon.

"We believe this approach addresses Fair Credit concerns and at the same time it preserves many of the benefits of the dealer reserve structure," said NADA General Counsel Andy Koblenz. Dealer reserve is the dealership's share of the interest rate profit on a loan, also known as dealer markup.

It is the first time NADA has recommended a specific course of action to its members on the issue of dealer reserve in response to the CFPB.

A NADA spokesman said the association had provided copies of the proposed guidelines to both the Justice Department and the CFPB prior to Friday's announcement but had received no response.

After the announcement, a CFPB spokeswoman said in a statement:

"The Bureau welcomes proactive proposals that demonstrate a commitment to fair lending. We look forward to reviewing the guidance issued today.

"In general, that model was negotiated in settlements involving dealers, whereas our focus is on lenders. We remain concerned about indirect lending programs built around discretion and financial incentives that create fair lending risks. Because of this, lenders should be careful about assuming that dealer-level solutions fully address their own fair lending risks."

A big question is whether an approach modeled on the 2007 Pacifico Ford consent order, named for one of the dealerships involved in the Philadelphia case, is enough to satisfy the CFPB that dealerships aren't discriminating against legally protected classes such as minorities or women.

NADA is expected to distribute the “NADA Fair Credit Compliance Policy & Program” to its members.

Focus on Ficklin

On Thursday, Jan. 23, the day before the NADA announcement, Patrice Ficklin, assistant director for Fair Lending for the CFPB, was the main attraction at the American Financial Services Association Vehicle Finance Conference here. Washington-based AFSA is a lender trade group.

Its auto lender members include captives, banks and independent finance companies.

In a question-and-answer session, the audience asked Ficklin several variations of the same question: If we do this or that, would the CFPB approve?

Her answers could be paraphrased as: Show us the data, and we'll let you know.

For instance, Ficklin was asked: What if it takes more time and effort for dealerships to get finance contracts bought for less-qualified customers? Is that a legitimate reason for dealerships to charge more?

"If there's data that it took more time to match that consumer with financing, we haven't seen it," Ficklin said. "That is an argument we have heard, but we have not yet received that data."

The standing-room-only event left some lenders frustrated. "It's like the Supreme Court justice who said he couldn't define obscenity, but he knew it when he saw it," said an auto finance industry veteran who asked not to be quoted by name.

Asked by Automotive News on Thursday how the CFPB might react to a markup structure that set a ceiling and documented exceptions, Ficklin declined comment.

Up to dealers

Koblenz, the NADA lawyer, told Automotive News that NADA members have been asking the association for answers. "Members have been coming to us asking, 'What do we do? Is there anything we should be doing?'" he said.

"One of our functions is to be an advocate with government -- and we have been doing that," he said. "But the other thing we do is give guidance to our members." Koblenz said it's up to dealers to decide whether to adopt NADA's recommended approach.

Many dealerships already take a similar approach to the one recommended by NADA. And several other industry groups have recommended similar ideas over the last year, including the National Association of Minority Automobile Dealers, of Largo, Md.; the Association of Finance & Insurance Professionals, of Colleyville, Texas; and dealership software provider Dealertrack Technologies Inc.

In March, the CFPB said it wanted lenders to stop giving dealerships discretion in setting the dealer reserve, or dealer markup, on loans.

Dealer discretion on the fee can lead to higher interest rates for legally protected classes of borrowers such as minorities or women -- a "disparate impact," the CFPB said, even if there was no intent to discriminate.

Instead of dealer reserve, the CFPB recommended flat fees, or some other form of dealer compensation that takes discretion for setting consumer interest rates out of the hands of dealers.

The CFPB doesn't have jurisdiction over auto dealers, except for buy-here, pay-here operations. But the CFPB says it holds lenders responsible for lender policies that allow dealer discretion that leads to discriminatory behavior.

In December, auto lender Ally Financial Inc. agreed to pay $98 million to resolve allegations by the CFPB that Ally's manner of paying dealers for arranging contracts led minority car buyers into car loans with higher interest rates.

Since last spring, in response to CFPB pressure, lenders have been sending letters to some dealerships warning them that the lenders detected higher rates for dealer reserve for legally protected customers. In some cases the letters threatened the dealerships with termination of lending from the institution.

Ficklin reiterated last week that the CFPB is OK with dealers getting compensated for acting as middlemen on loans as long as they don't have discretion over setting customer interest rates.

"We are not saying dealers should add value for free. Dealers provide an important service for both lenders and consumers," she said. "It's clear compensation is not the problem -- only one method of compensation."

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