Pub. 2 Issue 2

18 www.glancda.org even if every finance source were to adopt them – is simple. Dealers typically sell credit contracts to a variety of finance sources, each finance source would set its own f lat fee, and dealers would exercise discretion in selecting the finance source to which they would sell the contract. Thus, far from eliminating dealer discretion, f lat fees would merely shift the primary exercise of that discretion from intra- finance source discretion (that is, the discretion a dealer exercises in determining how many basis points to add to the wholesale buy rate offered by a single finance source) to inter-finance source discretion (that is, the discretion a dealer would exercise in determining which f lat fee amount to choose from among the competing offers it received from multiple finance sources). Flat fees therefore would not eliminate dealer pricing discretion. This in turn means that, to the extent such discretion creates a risk of discrimination to the consumer, f lat fees would not eliminate that risk. And, if this risk of discrimination exists for the consumer, then a risk of liability for that discrimination exists for the dealer. 3 Consequently, in identifying the adoption of f lat fees as a silver bullet for eliminating fair credit risk, the Bureau has come up with a purported solution for individual finance sources and individual finance sources alone. It has not come up with the solution for the other two parties to an indirect financing transaction – the consumer and the dealer. 4 Because dealer pricing discretion is a feature of the indirect financing market that cannot and will not be eliminated by Bureau pressure on finance sources, then dealers, finance sources, and the government should consider ways to realistically and effectively manage the pricing discretion that dealers exercise. And this should be done in a manner that addresses the fair credit risk to each of the three parties to an indirect financing transaction (the consumer, the dealer, and the finance source) while preserving the overwhelming consumer benefits that result from a highly competitive marketplace. Fortunately, a tool exists that can help accomplish this objective. It is the NADA Fair Credit Compliance Policy & Program. The NADA program is modeled on a very well thought out fair credit compliance program contained in Department of Justice consent orders with two automobile dealers in 2007. A dealer who adopts the NADA program generally establishes a pre-set standard dealer participation rate (SDPR) that the dealer (i) adds to the wholesale buy rate offered by the finance source to which the dealer will assign the credit contract and (ii) includes in the offer of credit to the consumer. The dealer follows this approach for all offers of credit to consumers that involve dealer participation. However, the dealer can deviate downward from its SDPR and offer the consumer more favorable credit terms if any of several allowable deviations are present. One example of an allowable deviation – each of which consists of a good faith, pro-competitive factor that is unrelated to the consumer’s background and therefore consistent with ECOA – is lowering the SDPR to “meet or beat” a competing offer that has been presented to the consumer. The dealership employee making the credit offer records the actual dealer participation rate included in the credit offer and the reason for any deviation from the SDPR. The dealer also appoints a program coordinator who reviews the transaction to ensure it was properly executed and who otherwise conducts training, oversight, and reporting to ensure the dealer’s fair credit compliance program is faithfully carried out. The NADA Fair Credit Compliance Policy & Program is not required, and has not been adopted as a safe harbor, by  Fallacy of Flats — continued from page 16 FOR THE INDIVIDUAL FINANCE SOURCE THAT ADOPTS A FLAT FEE POLICY, THE CFPB STATES THAT THE ANSWER IS “YES.” HOWEVER, FOR THE DEALERS WHO SELL PAPER TO THAT FINANCE SOURCE AS WELL AS TOOTHER FINANCE SOURCES, THE ANSWER IS DECIDEDLY “NO.”