Public dealer groups receptive to NADA compliance plan

Monaghan: No clarity from industry or Consumer Financial Protection Bureau on dealer reserve.
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Some of the big public retail groups are reacting positively to the National Automobile Dealers Association's recommendations that dealerships adopt a hard percentage cap on dealer reserve and then document any discounts offered.

"We appreciate where [NADA is] going, to try to nail down something concrete," said Craig Monaghan, CEO of Asbury Automotive Group, during a conference call on Tuesday. "We don't feel like our industry or the [Consumer Financial Protection Bureau] has given us the clarity we would very much like to have."

Asbury already has its own fixed caps on dealer reserve and on F&I products, but it doesn't document why customers may have gotten a discount, company officials said.

"For the time being, we're going to continue with the programs we have in place," Monaghan told Automotive News. "I'd just reiterate we have caps on our product, we cap the pricing of the products, we have a very aggressive internal audit program, we're working to make sure that we're always treating our customers fairly. We use an outside law firm in addition to those programs."

Meanwhile, AutoNation Inc. said on Jan. 30 it would try out the NADA approach at a few stores. Group 1 Automotive was more enthusiastic, saying on Jan. 24 it would implement the changes across its entire U.S. dealer network.

NADA announced the recommendations on Jan. 24 as a way for dealerships to try and head off potential discrimination charges stemming from the Consumer Financial Protection Bureau's oversight of auto lenders. The CFPB can't regulate dealerships directly, but it is trying to get lenders to eliminate dealer discretion in setting dealer reserve.

When dealerships offer discounts from their fixed cap on dealer reserve, to be competitive with rival financing offers, for example, NADA proposed they be documented based on a set of preapproved reasons.

NADA e-mailed the "NADA Fair Credit Compliance Policy & Program" to members after it was announced, the association said.

The policy is based on a 2007 settlement between the U.S. Department of Justice and a couple of dealerships in the Philadelphia area.

Prosecutors said the dealerships discriminated by adding "higher interest rate markups" for minority borrowers than "similarly situated" buyers who were not minorities. In a consent order, the dealerships denied discriminating against minorities but agreed to a cap on dealer reserve, and agreed to provide a "good faith, competitive reason that is consistent with the Equal Credit Opportunity Act," for any discounts.

The amount of interest dealerships add to auto loans is called the dealer reserve. Lenders allow dealerships to add dealer reserve as compensation for arranging the loan.

The CFPB's position on dealer reserve is similar. According to the bureau, allowing dealerships discretion in setting the dealer reserve gives dealerships incentive to pad their own compensation, which in turn may lead, whether consciously or unconsciously, to minority buyers paying higher interest rates.

The bureau wants lenders to adopt flat fees or some other form of compensation in which dealers have no discretion.

The CFPB hasn't said whether it considers policies such as those recommended by NADA to be effective at reducing or eliminating discrimination.

In fact, in a written statement on Jan. 24 in response to NADA's announcement, the CFPB warned that "lenders should be careful about assuming that dealer-level solutions fully address their own fair lending risks."

Executives for Asbury and for AutoNation said separately they're not worried about the threat to dealer reserve because they each derive about two-thirds of their F&I revenue per vehicle retailed from F&I products, not from dealer reserve.

Said Asbury's Monaghan: "The bottom line for us is no matter what comes, we will be able to manage through it."

AutoNation ranks No. 1 on the Automotive News list of the top 125 dealership groups in the United States, with retail sales of 267,810 new vehicles in 2012. Group 1 ranks No. 4, at 128,550; Asbury is No. 7, at 77,712.

You can reach Jim Henry at autonews@crain.com.

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