Pub. 4 2014 Issue 3

17 for the dealer. 3 Consequently, in identifying the adoption of flat 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 a 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 Bu- reau pressure on finance sources, then dealers, finance sources, and the government should consider ways to realistically and ef- fectively 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 finance source) while preserving the overwhelming consumer benefits that result from a highly competitive marketplace. Fortunately, a tool exists that can help accomplish this objec- tive. 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 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 re- cords 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 any federal agency. Its adoption by a dealer is completely optional. Nevertheless, NADA believes the program provides a dealer who adopts it with a viable means of managing the dealer who adopts it with a viable means of managing the dealer’s fair credit risk – and, in turn, the fair credit risk presented to its customers – while allowing dealer pricing discretion to be exercised in a standard- ized manner that lowers the cost of credit for consumers. This approach should appeal not just to dealers, but also to indirect finance sources and the CFPB as they consider ways to address fair credit risks as the retail level. With regard to flat fee compensation programs, dealers can enter into them and NADA expresses no opinion as to the relative merit of any particular flat fee or other compensation program. The decision to enter into any compensation program, whether involving dealer participation, a flat fee or another compensation arrangement, is an individual one that the dealer should make in consultation with its legal counsel. However, NADA cautions dealers to be wary of any claims that flat fee compensation programs somehow eliminate the dealer’s risk of violating fair credit laws. For the reasons stated above, these programs do not eliminate that risk for dealers who sell their contracts to multiple finance source partners. And, because they do not eliminate that risk, dealers who enter into flat fee compensation arrangements must decide how they will manage that risk, much as the NADA Fair Credit Compliance Policy & Program sets forth an optional mechanism for managing the fair credit risk associated with compensation programs involving dealer participation.  1 CFPB Bulleting 2013-02 (Mar, 21,2013). 2 A “flat fee pricing mechanism” generally refers to a finance source policy that compensates dealers for originating consumer credit contacts with a flat dollar amount per transaction, a percentage of the amount financed, or another fixed formula for determining the dealer’s compensation. These policies do not permit dealers to exercise any form of pricing discretion, such as offering consumers a discounted annual percentage rate (APR) in order to earn their business. 3 As with finance sources, dealers are exposed to significant liability for ECOA violations. 4. A broad industry adoption of flat fees in response to pressure from the CFPB would also create the risk of steering consumers to high-cost credit contracts, as dealers would be incentivized to sell their credit contracts to the finance source that offers the highest flat fee (which likely would result in higher APR’s being paid by consumers). This article was prepared by Paul D. Metrey, Chief Regulatory Counsel, Financial Services, Privacy, and Tax for the National Automobile Dealers Association. With regard to flat fee compensation programs, dealers can enter into them and NADA expresses no opinion as to the relative merit of any particular flat fee or other compensation program.