Unloading the Fair Credit Program

The genesis of a Fair Credit Program occurred when the Obama administration’s Consumer Financial Protection Bureau (CFPB) issued guidance to the finance sources it has oversight of. This guidance required the finance sources who service the auto industry to monitor their portfolios to ensure there wasn’t any negative disparate impact against protected classes. 

Shortly after the CFPB guidance, the National Automobile Dealers Association (NADA) published its Fair Credit Compliance Policy and Program. 

The NADA Fair Credit Compliance Program recommends establishing a Standard Dealer Participation Rate (the standard rate or a rate matrix with a pre-set dealer participation markup, usually 200 or 250 basis points over the buy rate) and to document any downward movement from the standard mark up. Some dealers adapted the NADA program. Those that didn’t generally felt adapting the program did not provide safe harbor protection or they didn’t feel the additional paperwork was worth the effort.

Nissan Motor Acceptance and Infiniti Financial Services (jointly NMAC) recently set the bar for finance sources who service the automotive sector regarding a Fair Credit policy. It became the initial finance source who requires its dealers to choose between a flat rate dealer reserve program or a dealer reserve program capped at two points based on a condition of documented Fair Credit compliance. These reserve programs apply to retail deals financed with NMAC. 

If the dealer chooses the flat rate program it must contract every retail deal at the buy rate and is paid a flat dealer reserve. Adapting the flat rate program limits any further compliance documentation as every financed deal will be contracted at a rate set by NMAC. 

NMAC selected the NADA Fair Credit Compliance Policy and Program guidelines for a dealer to document compliance if the dealer selects the second option which gives the dealership the flexibility to set the customer’s APR. 

Under this program the dealer is capped at 200 basis point markup. That is likely the standard markup. Any deal that deviates from the standard markup must have a documented reason for coming off the standard markup. There are seven possible reasons for a deviation from the standard markup. Compliance is documented on every retail deal sourced to NMAC via yet another form titled Dealer Participation Certification Form.

This form gathers the deal identifiers (customer name, VIN, date, and assignee), the standard markup percentage, the specific transaction markup, the reason for the deviation from the standard markup, and requires two signatures. 

While I cannot speak to the specifics of what NMAC would audit for on this form in the event it decides to audit your portfolio, I can say we conduct compliance audits at some dealers who voluntarily implemented the NADA Fair Credit program. Here are a few of the documentation issues to be aware of. 

The form was not completed or is not in file. This is problematic because the intent of the program is to document the reasons for the deviation while the deal is still fresh in the minds of the managers who participated in the deal. Completing the form weeks later or when the dealer is notified of an impending audit can lead to false reporting of the reasons for the deviations from the standard markup.

A different finding in our audits is that the form was in the file but was not properly completed. One typical completion error include misstating the dealer's standard markup or the dealer reserve spread on the deal. Sometimes the manager will use the deal’s buy rate instead of the standard markup or list the final APR on the deal instead of the dealer reserve spread.

Another issue is that the reason for the deviation from standard markup was not checked or checked the wrong reason. Of the seven reasons provided on the form, the first one is ‘Dealer Participation limited by finance source.’ Too often that is the default reason on every deal, even though the finance source did not limit the dealer spread. The reason to check a valid reason to deviate from standard is to help build a case that the dealer deviated for non-discriminatory reasons. Checking the same box every time defeats that argument.

Continued Good Health, Good Luck, and Good Selling.