Make Disparate Impact a Nonissue at Your Dealership
Ever since the Consumer Financial Protection Bureau (CFPB) issued Bulletin 2013-02, “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act,” dealer reserve and disparate impact have dominated auto finance discussions. This August 10, the larger participant rule for automobile financing becomes effective, and the CFPB will have supervisory authority over the originators of 90% of nonbank auto loans and leases.
The CFPB released Bulletin 2013-02 two years ago. The CFPB’s disdain for dealer markup has resulted in a large consent decree, settlements, investigations, and most recently, has been rumored to possibly affect the way three captives (American Honda Finance Corp., Toyota Motor Credit Corp., and Nissan Motor Acceptance Corp.) compensate dealers.
As a dealer or dealer operator, it is essential for you to understand disparate impact and what it means for your dealership operations.
Many dealers are unprepared
Given the CFPB’s focused agenda, results from a recent eLEND Solutions survey are surprising. Of dealers surveyed, 80% expect the CFPB to impact their business, yet less than half have implemented policy changes to address this issue.
One explanation given for this result is misunderstanding of disparate impact by dealership personnel, and how to protect themselves from its changes to how they operate. When I speak with dealers and to dealer groups on this issue, I ask two general questions:
- Do you like your current finance model?
- Do you want to keep the current dealer reserve model?
The answer to both questions is always a resounding yes. During discussions of what should be done at the dealership to preserve the current compensation model, however, talk inevitably turns toward the unfairness of the theory, and the need for Congress to trim the CFPB’s sails.
It’s apparent that most dealers, once focused on practices to protect themselves against disparate impact claim, see a fair lending program, like the one suggested by NADA, as another regulatory form they have to complete in the sale process. This misunderstanding by dealers has led to inaction by many.
How to neutralize the issue
A fair lending program where all customers are started at the same markup, and where deviations are made only for preestablished exceptions—with exceptions documented—is not a requirement of government regulators. It is the hope of the CFPB, as well as others who are not fans of dealer markup, that dealerships never implement such a program.
The reason for this is simple: Absent a documented process at the dealership level to explain the difference in rate between similarly situated customers, the government will continue to have a field day with statistical analysis, and will find disparate impact.
Claims of disparate impact collapse, however, when a dealership can show it has an established a fair lending policy for all customers, and can document why the rates vary between similarly situated customers. Documenting differences in rate is not required by any regulation. Adopting such a policy benefits and protects your dealership from questionable claims of disparate impact made by the government, plaintiffs’ lawyers, or lenders.
A little forward thinking now—and using a one-page rate exception form—can level the disparate impact playing field for your dealership. Absent such a program, you are just sitting back and hoping the CFPB, Department of Justice, and states’ attorneys general change their minds on the issue.
If this is your position, it will be a long wait. Otherwise, get sound advice and make the appropriate right response today. For more information on this subject, contact the author or visit the Automotive Compliance Consultants website.
David R. Missimer, email@example.com, is general counsel for Automotive Compliance Consultants Inc. (www.compliantnow.com). He spent 28 years in private practice as a litigator representing lenders, auto dealers, and numerous other entities and individuals.