Pub. 2 Issue 2

16 www.glancda.org S ince at least early 2013, the Consumer Financial Protec- tion Bureau (CFPB or Bu- reau) has exerted substantial pressure on indirect finance sources to change the way they compen- sate automobile dealers for originating credit contracts with consumers. The Bureau has taken this action based on its belief that finance source compensation policies that allow dealers to exercise discretion in determining the amount they earn for originating consumer credit contracts (known as “dealer par- ticipation” or “dealer reserve”) create a “significant risk” that certain groups of consumers (based on race, national origin, or other prohibited factors) will pay more dealer participation than other groups of similarly situated consumers, in violation of the federal Equal Credit Opportunity Act (ECOA). Because the Bureau believes that dealer pricing discretion is the source of this fair credit risk, the Bureau declares that finance sources can take one of two actions to address it. A finance source can constrain dealer pricing discretion by imposing a series of controls on that discretion and monitoring the dealer participation earned in the credit contracts it purchases from dealers. Alternatively, a finance source can forgo this process by eliminating dealer pricing discretion and compensating dealers with “another mechanism, such as a f lat fee per transaction, that does not result in discrimination.” 1 But if finance sources were to adopt a f lat fee pricing mechanism, 2 would that indeed eliminate dealer pricing discretion and the risk of unlawful pricing disparities that the Bureau maintains results from such as discretion? For the individual finance source that adopts a f lat fee policy, the CFPB states that the answer is “yes.” However, for the dealers who sell paper to that finance source as well as to other finance sources, the answer is decidedly “NO.” The reason f lat fees would not eliminate dealer pricing discretion –  Fallacy of Flats — continued on page 18 The Fallacy of Flats Beware of Claims that Flat Fees Eliminate a Dealer’s Risk of Violating Fair Credit Laws