Pub. 1 2021 Issue 2

7 KENTUCKY AUTO DEALER to consumers should not be eliminated by unwarranted and untested government intrusion into the marketplace. Notwithstanding the flaws of such a mandate, concerns about “unfettered” pricing discretion expressed by the acting chair of the Federal Trade Commission (FTC) and others should not be ignored. Dealers should consider ways to address those concerns while striving to provide their customers with affordable and competitively priced products. One approach a dealer should consider (managing discretion while promoting competition) when earning dealer participation in a credit contract is to adopt the optional NADA/NAMAD/AIADA Fair Credit Compliance Policy & Program (NADA Fair Credit Compliance Program). 1 The NADA Fair Credit Compliance Program was not developed in a vacuum. Instead, it stems from – and fully adopts – an approach to fair credit compliance outlined in consent orders that the Department of Justice (DOJ) entered into with two automobile dealerships to settle pricing discrimination claims in 2007. 2 In those consent orders, the dealers were required to adopt specifications known as “Guidelines for Setting Dealer Reserve.” This was how the dealer established standard participation rate (SDPR) that included in credit offers to consumers (i.e., the dealership would offer an APR the sum of the wholesale buy rate offered by the finance source and its SDPR) unless a “good faith, competitive reason” that supports a lower dealer participation rate was present in the transaction. The consent orders included seven such legitimate business reasons for discounting the SDPR, with the three most common being the presence of a lower cap imposed by the finance source, a consumer’s monthly budget constraint and a consumer’s access to a more competitive offer. The consent orders further required that any deviations from the SDPR be recorded on a pricing certification form, reviewed by the general manager or his or her designee and retained by the dealership. In November 2013, while speaking at a Consumer Financial Protection Bureau (CFPB) Auto Finance Forum, a senior DOJ official 3 validated this approach when explaining that: (i)pricing discretion is not prohibited by the Equal Credit Opportunity Act; (ii)however, when exercised, pricing discretion presents a fair lending risk that needs to be managed; and one way to manage that risk is to adopt the approach outlined in the 2007 DOJ consent orders. 4 Two months later, after extensive preparation and review, the three national trade associations representing franchised automobile dealers released the NADA Fair Credit Compliance Program. As noted above, the NADA Fair Credit Compliance Program fully adopts the framework established in the DOJ consent orders and builds on it. A dealer who adopts the program has it approved by its board of directors and appoints a senior dealership official to serve as the Program Coordinator (PC). The PC oversees the implementation and maintenance of the program by establishing the SDPR, conducting initial and periodic training, reviewing pricing certification forms, submitting an annual compliance report to the board and performing other related tasks. The program explains each of these steps in detail. Since its inception, the NADA Fair Credit Compliance Program has gained widespread support from many prominent observers both inside and outside of the industry. 5 Recent additions to the list of supporters include (i) the American Bar Association, which overwhelmingly approved a resolution at its 2020 annual meeting that, in part, urges governments at all levels to offer “a safe harbor against pricing discrimination claims for dealers that faithfully implement the NADA/NAMAD/AIADA Fair Credit Compliance Policy and Program”; 6 and (ii) a CFPB Taskforce on Federal Consumer Financial Law, which made a similar recommendation to the CFPB and the Federal Reserve Board in Jan. 2021. 7 The FTC has also seen value in this approach to managing pricing discretion. It included the framework and many elements of the NADA Fair Credit Compliance Program in a May 2020 consent order it entered into with an automobile dealership to settle allegations of intentional credit discrimination. 8 CONTINUED ON PAGE 8 MANY FINANCE SOURCES THAT ARE ASSIGNED CREDIT CONTRACTS COMPENSATE DEALERS WITH NON-DISCOUNTABLE FLAT FEES. THE NATIONAL AUTOMOBILE DEALERS ASSOCIATION TAKES NO POSITION ON THE FORM OF COMPENSATION FREELY ENTERED INTO BY DEALERS AND THEIR FINANCE SOURCES.