It has been nearly a year since the Consumer Financial Protection Bureau issued its March 2013 bulletin that created an F&I firestorm. It put the financial institutions under CFPB jurisdiction on notice they could be held liable for alleged lending discrimination in the retail credit agreements purchased from dealers. The bulletin cited no factual support or methodology to measure the alleged disparity, and the purpose of the communication was transparent – to impose such onerous obligations on the financial institutions they would see imposition of flat fees on dealers as their only alternative.
The CFPB underestimated the backbone of dealers. The National Automobile Dealers Association commenced a comprehensive challenge to the CFPB’s actions in Congress, with the CFPB, and in the media. The CFPB has faced widespread questions and criticisms about its position.
Late in 2013, the CFPB and the U.S. Justice Department signed a consent order with Ally Financial, one of the nation’s largest buyers of auto paper, resulting from allegations of lending discrimination. Many observers feared this would be the first step in implementation of flat fees by one of the industry’s largest finance sources. However, Ally just announced it will not be the “Trojan horse” on implementation of such fees.
There is an ongoing struggle over dealer participation, and the struggle is likely to continue. Under the CFPB’s March 2013 bulletin, financial institutions under the jurisdiction of the CFPB will continue to notify dealers of their commitment to fair lending, monitor dealers’ activities, and take action when appropriate. Dealers may continue to receive communications from their finance sources, and they may even receive communications from the U.S. Justice Department or the Federal Trade Commission.
So what should a dealer do?
- Adopt a fair lending policy. Have a written policy of non-discrimination in credit. There are many available examples for a policy. One which dealers should note was issued by NADA for its 2014 annual convention. But fair lending policies by F&I providers and others can be the basis of a dealer system.
- Adopt a standard dealer participation rate. The basis for the charge of discrimination is that dealers vary their participation rate based on the customer with disparate impact on protected classes. The best way to battle a charge of disparate impact is to have a standard dealer participation rate to apply to the buy rate of a finance source. Deviations from that rate should occur only for specified non-discriminatory reasons. Each dealer must make an independent decision on the standard participation rate. The reasons for deviation, however, should be for non-discriminatory reasons, and prior consent orders settling lawsuits by the U.S. Justice Department against dealers and finance sources provide certain factors that can be a safe harbor for a dealer. Dealers should consult the fair lending program established by NADA, F&I marketing companies, and others in developing their own policy forms.
- Train personnel. No system will work if the personnel who must use it refuse to or can’t do so. Announce your program, explain the importance, and train employees in using it.
- Follow up. You cannot be sure if the program is being used unless a senior dealership official follows up. Check deals. Is the standard dealer participation rate being used? Are deviations properly explained? Is the process form in every credit deal?
- Take action on discrepancies. It should go without saying that exceptions will become the rule unless dealership managers follow up to make sure that the dealership’s systems are being used appropriately.