MCLEAN, Va. —The National Automobile Dealers Association (NADA) issued a memo this week warning dealers that flat-fee compensation does not eliminate a dealer’s risk of violating fair credit laws when arranging vehicle financing for their customers.

According to a bulletin issued in March 2013 by the Consumer Financial Protection Bureau, a flat-fee mechanism would allow finance sources to fairly compensate dealers while eliminating the possibility of discrimination against minority car buyers. The bureau claimed a dealer’s ability to “markup” the interest rate on retail installment sale transactions in exchange for services rendered — known as dealer participation or dealer reserve — is causing car buyers from minority groups to pay higher rates.

The NADA said in its memo, titled “The Fallacy of Flats,” that an industrywide move to flat fees would not eliminate discretion. Prepared by Paul D. Metrey, the NADA’s chief regulatory counsel, the memo stated that even if all finance sources switched to a flat-fee compensation method, dealers would still exercise discretion in selecting the finance source to which they would sell a contract.   

“Flat fees therefore would not eliminate dealer pricing discretion. This in turn means that, to the extent such discretion creates a risk of discrimination to the consumer, flat fees would not eliminate that risk,” the memo read, in part. “And if this risk of discrimination exists for the consumer, then a risk of liability for that discrimination exists for the dealer.

“Consequently, in identifying the adoption of flat fees as a silver bullet for eliminating fair credit risk, the bureau has come up with a purported solution for individual finance sources and individual finance sources alone. It has not come up with a solution for the other two parties to an indirect financing transaction — the consumer and the dealer.”

The NADA pointed to its Fair Credit Compliance Policy and Program, which it launched at its convention in January, as a means of avoiding fair lending risk. The program has not been adopted by any federal agency, although the CFPB’s former assistant director of its Office of Installment and Liquidity Lending Markets, Richard Hackett, told F&I and Showroom in April that it “has the potential to make significant inroads on the problem.”

When asked whether a flat fee system is susceptible to fair lending issues, the former regulator said: “…the basic question with flats is, would the market develop in such a way that higher priced lenders were paying higher flats and minority consumers were steered to higher-priced loans in disproportionate numbers? The mitigator of that is what dealers say to us, which is there’s intense competition around rates at the retail level. If that’s true, then steering is not an issue.”

To read the NADA’s memo, click here.

To read the full interview with Hackett, click here.

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