Fair Credit Compliance in the Last 20 Years

Nissan and Infiniti dealers were recently presented with a choice to either implement and conform with the National Automotive Dealers Association (NADA) Fair Credit Compliance Program or move to a flat rate reserve program with their captives (Nissan Motor Acceptance or NMAC and Infiniti Financial Services or IFS). This is just the latest milestone in moving the industry to a documented Fair Credit Program that I know started at least 20 years ago. I know because I started compliance training for dealers using the concept.

The Concept

The genesis for the concept, now known as Fair Credit Compliance, was to help dealers deflect claims of discriminatory pricing and payment packing, both of which were more prevalent than they are today.

The process is very simple. Establish a standard rate to start each deal (first pencil). Consistently apply this standard rate on the first pencil and it doesn’t matter if the customer is a member of a protected class. Since every consumer starts at the same rate, there is less risk of discriminating. There is also less risk of packing payments using rate.

We established two possible rates to use for the first pencil depending on whether the dealer knows the consumer’s credit score. If the dealer did not know the credit score, then an established standard rate must be used. If the credit score is known, then we established a rate matrix driven by credit score bands.

As we all know, there will be exceptions to starting a deal at a different rate than the standard rate. For example, there may be a manufacturer supported APR. Or the consumer may ask for the payment at a specific APR. Our training instructed the dealer to make an appropriate note for the deviation from the standard rate on the first pencil.

Of course, even with starting at a standard rate, discriminatory pricing and payment packing can take place in subsequent pencils. But starting the deal at a non-discriminatory or consistent payment structure improves the likelihood of compliance.

Consumer Financial Protection Bureau Guidance

The next milestone in a Fair Credit Program occurred when the Obama administration’s Consumer Financial Protection Bureau (CFPB) issued guidance to the finance sources it has oversight of. This guidance required the finance sources who service the auto industry to monitor their portfolios to ensure there wasn’t any negative disparate impact against protected classes. While this rule was directed at the finance sources, they in turn tried different approaches with their dealers to minimize potential disparate impact. In short, the varied approaches to reign in dealer’s portfolios was quite a convoluted mess.

NADA Fair Credit Compliance Program

Shortly after the CFPB guidance, the National Automobile Dealers Association (NADA) published its Fair Credit Compliance Policy and Program. This program reflected the concept we started training on 20 years ago and was modeled after a 2007 consent decree between the Department of Justice (DOJ) and two dealers that resolved claims of unintentional disparate impact.

The NADA Fair Credit Compliance Program recommends establishing a Standard Dealer Participation Rate (the standard rate or a rate matrix with a pre-set dealer participation markup, usually 200 or 250 basis points over the buy rate) and to document any downward movement from the standard mark up. While our original concept suggested documenting exceptions on the final pencil, the NADA program developed a form to document exceptions (Dealer Participation Certification Form). Some dealers adapted the NADA program. Those that didn’t generally felt adapting the program did not provide safe harbor protection or they didn’t feel the additional paperwork was worth the effort.

CFPB Guidance Rescinded

When Trump took office, the previous guidance regarding disparate impact was rescinded. Most of the dealers who had adapted the NADA program continued to document exceptions using the forms provided in the NADA template. I am not aware of any dealers who adapted the NADA program after the guidance was rescinded.

Current Atmosphere

NMAC and IFS have certainly moved the industry closer to a majority of the dealerships adapting the NADA program. The concept we started training on over 20 years ago remains a valid concept. Whether a dealer formalizes the process using the NADA program, or documents exceptions in its e-desking software, it remains a good business practice to avoid discriminatory pricing or deceptive sales practices.

Continued good health, good luck, and good selling.

Gil Van Over is the Executive Director of Automotive Compliance Education (ACE), the Founder and President of gvo3 & Associates, and the author of Automotive Compliance in a Digital World.