F&I and Showroom, February 2014

Legal Solutions aimed at heading off the CFPBs and the Justice Departments scrutiny of rate participation has the magazines legal wiz smiling with satisfaction mainly because they put the two agencies at odds just a bit By Michael Benoit A s you may already know Ally Financial agreed to pay 98 million to settle allegations that it charged higher interest rates to minority purchasers The order issued jointly by the Department of Justice DOJ and Consumer Financial Protection Bureau CFPB claimed Ally discriminated against more than 235000 minority borrowers who between April 2011 and December 2013 paid higher interest rates for their auto fi nancing than similarly situated nonminorities The alleged discrimination was according to the CFPB a result of Allys discretionary pricing system which allows dealers to mark up the wholesale buy rate up to 250 basis points The CFPB found African Americans paid 29 bps more Hispanics 20 bps more and Asian Pacifi c Islanders 22 bps more And according to the settlement Ally will distribute 80 million in damages to those impacted by the alleged discrimination One of the key issues in the investigation was the CFPBs assertion that Ally failed to maintain a robust dealer monitoring program As a result a major requirement under the settlement is that Ally must now implement such a program But whats really interesting is the settlement says Ally can forgo the monitoring program if it does away with dealer discretion in pricing This to me reveals the CFPBs true agenda I mean what better way to eliminate potential discrimination than to obligate the dealer to no more or less than the buy rate The CFPB has consistently said it believes dealers should be compensated for helping consumers attain vehicle 44 F I and Showroom February 2014 fi nancing The bureau has also said its not married to a fl at fee structure and that it is open to other compensation methods Its a change in stance that I believe is the result of the education the bureau has received about the economics of auto fi nance as well as pushback from Congressional lawmakers And make no mistake about it that pushback is the direct result of tireless efforts by all of you who have been walking the halls of Congress and writing to your Congress people There is a lot more to the Ally settlement but the dealer monitoring requirement is what should be of most interest to dealers No doubt you have already received communications from your fi nance sources about your obligations under the Equal Credit Opportunity Act Some of you may have also received letters warning you that your pricing is out of whack Well you can expect to see more of that going forward The biggest takeaway from the Ally settlement is that fi nance companies are going to have to be far more aggressive in policing dealer pricing if they want to mitigate the potential for large fi nes and settlements And fi nance companies with more robust dealer monitoring programs are far more likely to experience less regulatory pain Thats why dealers should expect more oversight by their fi nance sources The National Automobile Dealers Association NADA unveiled a fair lending program at its annual convention in January that was generally well received by the membership The solution is based on a settlement from a few years ago between a handful of dealers and the DOJ and it basically has dealers implementing a standard retail rate that they can reduce based on predetermined and documented business justifi cations The upside of the program is that its Justice Department approved The CFPB however doesnt like it mainly because the solution allows dealers to retain limited discretion to mark down a rate I love it because it puts the two agencies at odds a little bit and its always entertaining to watch that sort of thing unfold But seriously every dealer should expect 2014 to be an evolutionary year in terms of their relationships with fi nance sources All of them will be creating or beefi ng up dealer monitoring programs Thatll result in some unwelcomed letters and actions taken against dealers The NADA may be successful in its push to promote its fair lending program which for some dealers fundamentally changes the way they manage their F I operations While the program may be damaging economically to some dealers by and large its a good solution for the industry in that it provides documentation to justify dealer pricing decisions Bottom line we are living in a very fl uid environment Dealers will need to be prepared for whatever may come down the pike Michael Benoit is a partner in the Washington D C offi ce of Hudson Cook LLP He is a frequent speaker and writer on a variety of consumer credit topics Email him at michael benoit@ bobit com Nothing in this article is legal advice and should not be taken as such Please address all legal questions to your counsel Wedge Play