Pub. 4 2014 Issue 3

16 AUTOMOBILE DEALER NEWS ILLINOIS www.illinoisdealers.com The Fallacy of Flats Beware of Claims that Flat Fees Eliminate a Dealer’s Risk of Violating Fair Credit Laws T he 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 participation” or “dealer reserve”) create a “sig- nificant 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 the fair credit risk, the Bureau declares that finance sources can take one of two actions to address it. A fi- nance 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 flat fee per transaction, that does not result in discrimination.” 1 But if finance sources were to adopt a flat fee pricing mecha- nism, 2 would that indeed eliminate dealer pricing discretion and the risk of unlawful pricing disparities that the Bureau maintains results from such discretion? For the individual finance source that adopts a flat fee policy, the CFPD 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 de- cidedly “NO.” The reason flat fees would not eliminate dealer pricing dis- cretion – 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 flat fee, and dealers would exercise discretion in selecting the finance source to which they would sell the contract. Thus, far from eliminating dealer discretion, flat fees would merely shift the primary exercise of that discretion from intra-finance source discre- tion (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 flat fee amount to choose from among the competing offers it received from multiple finance sources). Flat fees therefore would not eliminate dealer pricing dis- cretion. This in turn means that, to the extent such discretion creates a risk of discrimination to the consumer, flat fees would eliminate that risk. And, if this risk of discrimination exists for the consumer, then a risk of liability for that discrimination exists Since at least early 2013, the Consumer Financial Protection Bureau (CFPB or Bureau) has exer ted substantial pressure on indi rect finance sources to change t he way t hey compen s a t e au tomob i l e dealers for originating credit contracts with consumers.