Commentary: NADA’s Solution Reduces Fair Credit Risks



Oct. 23, 2014 - When I met with the Automotive Press Association in Detroit earlier this month, I had one goal in mind: inform the journalists and industry executives about how the real dealer franchise system works and set the record straight. There's been a lot of misinformation reported in the news lately about the business model of new-car dealerships.

The fact of the matter is that the dealer retail network is the most competitive, cost-effective and pro-consumer model for buying and financing vehicles.

Fierce competition between local dealers in any given market drives down prices for car buyers both in and across brands. If a factory owned all of its stores it could set prices and car buyers would lose virtually all bargaining power and would be stuck paying the full sticker price. And dealer-assisted financing-which is always optional-provides car buyers with competitive rates on auto financing, which are frequently more affordable than what car buyers can get from a bank or credit union. But the federal government is trying to take away the right of car buyer's to get discounted rates from dealers.

In March 2013, the Consumer Financial Protection Bureau-without prior notice or public comment-issued 'guidance' on indirect auto lending that pressures finance sources to compensate dealers with a flat fee. The CFPB claims that negotiated interest rates between dealers and their customers can create a significant risk of unintentional 'disparate impact' discrimination.

The National Automobile Dealers Association strongly opposes discrimination in any form and fully supports the efforts of the CFPB, the Department of Justice, the Federal Trade Commission and other federal agencies to eliminate it from the marketplace. However, it is essential that the government address this issue in a way that will effectively address fair credit risks while preserving competition in the marketplace.

A government imposed flat fee model wouldn't benefit consumers because it would eliminate their ability to get a rate discount on their auto financing. Under the current system, dealers have an incentive to select lenders that offer them low wholesale buy rates and dealers frequently have to discount the APRs they offer their customers to earn their business. This dynamic drives down rates for our customers. If the CFPB were to succeed in getting the industry to shift to an across-the-board flat fee compensation system, dealers' incentive would shift to choosing lenders that pay them the highest flat fee, which in turn would frequently result in higher APRs for consumers.

A mandatory flat fee compensation system also would fail to remove the fair credit risks that a dealer is exposed to when it lacks a legitimate business explanation for earning different amounts in its credit transactions.  

Fortunately, NADA has identified a way forward that addresses both fair credit and competition considerations.

Last January, the association developed the NADA Fair Credit Compliance Policy and Program that provides a dealer with an optional mechanism to promote compliance with fair credit laws. The program was released in partnership with the American International Automobile Dealers Association and the National Association of Minority Automobile Dealers.

The voluntary program addresses fair credit risks by ensuring that the amount of dealer reserve earned in a transaction is supported by a legitimate business reason. A dealer following the program sets a standard starting point for dealer reserve that it includes in its credit offers to consumers and only deviates from that rate for predetermined, legitimate business reasons. These include the presence of a monthly budget constraint, a more competitive offer and inventory reduction considerations. The dealer documents each pricing decision so that it can demonstrate that it was based on a legitimate, non-discriminatory factor. The NADA program fully incorporates the program created by the Department of Justice for two auto dealerships in 2007 to resolve fair credit cases.

By creating this structure and supporting it with appropriate training and oversight, the NADA program provides a mechanism for addressing fair credit concerns at the consumer, dealer and lender levels.

Last month, Marlin Stutzman (R-Ind.) and Reps. Ed Perlmutter (D-Colo.) introduced H.R. 5403, a bipartisan bill that would nullify the CFPB's 2013 auto lending 'guidance.' The bill would require new CFPB guidance involving auto financing to be transparent and open to public participation. Already 118 Members of Congress (46 Democrats and 72 Republicans) in the U.S. House of Representatives have committed to cosponsor or are cosponsors of this important measure. For more information, visit

The NADA Fair Credit Compliance Policy and Program presents the industry with a realistic and effective means of addressing fair credit risks at all levels and in a manner that preserves robust competition in the marketplace. The federal government should encourage its broad adoption.  

McConnell is a Honda/Acura dealer in Montgomery, Ala. NADA represents nearly 16,000 new car and truck dealerships with about 32,000 domestic and international franchises.





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