More than a decade ago, a Philadelphia car dealer created a solution for a longstanding challenge for the financial services industry — allegations that racial bias led to higher interest rates for minority borrowers. Because of Pacifico Ford, the automotive retail industry had a plan of action for how to both satisfy regulators and balance profits and customer service when arranging loans for customers.
Kerry Pacifico, who died last month of heart failure at the age of 95, was the mastermind behind the Pacifico approach, a strategy of standardizing how interest rates are charged on auto loans. It came about after the U.S. Justice Department filed complaints alleging violations of fair-lending regulations against Pacifico and other Philadelphia dealers.
The key to the approach, developed by Pacifico to help settle that case, was that if a dealership needed to reduce the interest rate to remain competitive, it could do so as long as the change could be explained in the customer's file.
Terry O'Loughlin, director of compliance for Reynolds and Reynolds, said if a dealership charges 2 percent for every transaction as its maximum, everyone started with the same percentage of reserve. Dealer reserve is the retail margin a dealership earns for arranging a loan.
"This case provided a framework for dealers to address disparate impact," O'Loughlin said in an email.
Disparate impact happens when a legally protected class of borrowers, such as African Americans, pay a higher interest rate than similarly qualified white borrowers. It is considered discrimination, even if it's unintentional.
When the Consumer Financial Protection Bureau launched a campaign to monitor dealer reserve practices in 2013 that the agency said enabled discriminatory lending, the Pacifico-approach provided a guideline for how the industry tackled the scrutiny. It was the foundation for the National Automobile Dealers Association's dealer participation policy and program. Even though the bureau's lending guidance has since been reversed, the industry guidelines protect dealerships from lawsuits.
A World War II veteran and heavily awarded car dealer, Pacifico left lasting impressions on the automotive finance industry and his community. While industry attention around disparate impact has waned for the time being, Pacifico's passing provides an opportunity to remind dealership personnel to follow protocols and treat customers fairly.