Increased scrutiny from the Federal Trade Commission and Consumer Financial Protection Bureau regarding dealer lending practices is top-of-mind for many in the industry.

 In response, this Friday as the 2014 NADA Convention got underway, the National Automobile Dealers Association announced an optional program that it contends will strengthen a dealer’s ability to comply with fair credit laws while preserving their ability to competitively price auto credit.

The new NADA Fair Credit Compliance Policy and Program will also protect the right of each customer to negotiate for a lower interest rate, perhaps evening the playing field and calming some of the CFPB’s concern regarding discriminatory lending practices.  

Andy Koblenz, NADA executive vice president, legal and regulatory affairs, and general counsel; and Paul Metrey, NADA chief, regulatory counsel, financial services, privacy and tax, discussed the move during the opening day of the convention.

Koblenz began by outlining the CFPB’s guidance issued in March of last year that expressed several fair credit concerns regarding a dealer’s ability to price auto credit.

“The CFPB has yet to substantiate its claims to the public or Congress, even after many inquiries,” Koblenz said.

Though Koblenz agreed with the CFPB that there is no room for discrimination in automotive lending practices.

“We still remain in the dark as to the CFPB’s methodology and the regression factors it uses to compare different credit contracts and different people,” he said.

The CFPB is pushing flat fees for arranging financing, meaning no longer will dealers be able to “cut into their retail margin to beat an offer from the bank, credit union, or even another dealership.”

“This would greatly weaken the competition that creates significant downward pressure on interest rates to the benefit of all car and truck buyers,” Koblenz said.

NADA has found a way to address the government concerns, while also protecting consumers’ rights to negotiate a lower auto financing interest rate.

“The new NADA Fair Credit Compliance Policy and Program that we along with our sister associations AIADA and NAMAD are today sending to our members accomplishes this into two important ways,” said Koblenz.

First, the program addresses the CFPB’s concerns over the potential for inconsistent pricing of consumer credit and the program is consistent with the Department of Justice’s statement on this matter made Nov. 14, 2013, at the Auto Finance Forum hosted by the CFPB.

Second, the program provides that a dealer who decides to adopt it may discount an auto financing interest rate based on its own set of competitive criteria that has nothing to do with a person’s background.

“The ultimate goal is to keep auto financing affordable and accessible to all,” said Koblenz. “Dealers now have a powerful tool to document and demonstrate their financing policies comply with fair credit laws.”

The policy and program is modeled on a template based on a 2007 DOJ’s consent agreement in which the DOJ sought to address alleged unintentional disparate impact discrimination at two separate dealerships, NADA explained.

“Under the template, every transaction starts with a set amount of compensation that the dealer receives from the finance source for arranging the financing, which is the same for every consumer,” Koblenz said.

The dealership can then offer discounts based on legitimate factors that can affect finance rates, for example, lowering of an interest rate to meet a consumer’s monthly budget constraint.

“If a dealer decides to implement the program, that dealer will have taken concrete steps to comply with fair credit laws. It will also have the documentation to share with its lender, a regulator, or the courts, to address any allegation of improper interest rate pricing,” Koblenz concluded.

Shortly after the announcement was made, the American Financial Services Association issued a statement on the new program.

“Both vehicle finance lenders and dealers agree that discrimination in any form is unacceptable. AFSA applauds the National Automobile Dealers Association for taking a proactive approach to address fair lending concerns raised by regulators over the past year. AFSA believes that NADA’s new proposed Fair Credit Compliance Program is a step in the right direction,” said Chris Stinebert, AFSA president and  chief executive officer.