Trick me once, shame on you. Fool me twice, shame on me. Get me thrice…is anyone home upstairs?
Strike one, strike two, strike three – you’re out.
Knock three times on the ceiling…
See the pattern? In many situations, by the third time the same event happens to us, we should have learned from the first two and taken corrective actions.
We’ve been told by two different Agencies de Federales that lenders will be pursued for credit discrimination. Are we listening? Have we taken corrective actions in our processes to ensure we won’t be on the enforcement hit list?
The Consumer Financial Protection Bureau makes the following statement on its website:
“Congress made fair lending and equitable access to credit an important piece of the Bureau’s design. It created the Office of Fair Lending & Equal Opportunity to focus on these issues. Congress also gave the CFPB authority over two key federal fair lending statutes. The CFPB has authority over the Equal Credit Opportunity Act, which prohibits discrimination against applicants in any type of credit transaction.” This includes car loans.
The Dept. of Justice settled a credit discrimination claim with Bank of America for $335 million in December 2011 and a $32 million claim with Suntrust Mortgage in May 2012.
Both agencies intend to continue using similar approaches. Let’s look at what dealers can do in response, but first, a primer.
The Equal Credit Opportunity Act makes it illegal for a creditor to discriminate in any credit transaction against any applicant because of race; color; religion; national origin; gender; marital status; age (if the applicant is old enough to enter into a contract); receipt of income from any public assistance program; or exercising in good faith a right under the Consumer Credit Protection Act.
Using the ECOA as the basis of potential enforcement, the CFPB and Dept. of Justice, employing what is called disparate impact, are looking at potential patterns of discrimination, not individual cases in their enforcement actions.
They are looking at the results of the processes, not necessarily the intent to discriminate. Plaintiff attorneys previously used this tactic in a handful of class-action law suits against some lenders.
Similarly, both agencies suggest that transparency and documented processes will be important if their representatives come calling in connection with a potential enforcement action.
I can think of two processes where a dealer can develop and implement policies, procedures and processes to help deflect claims of disparate impact. The first is consistent payment quoting. If you quote payments in your sales process, you must have a consistent methodology on how the first payment quoted is calculated.
If your sales manager pulls a credit-bureau report before the first offer, develop a matrix based on credit scores. Then require the manager to use that rate to calculate the payment quote.
If your sales manager is not pulling credit before providing the first payment quote, implement an average rate.
If you deviate to use an incentive rate or the customer’s requested rate, document the exception. Otherwise, do not stray from your matrix.
Second, use rate-spread methodologies. I’m not an opponent or a proponent of one-price selling. Some dealers and groups are successful with it; others have tried and retreated. Still others have never attempted it.
However, given the apparently escalating risk of the government intending to pursue enforcement action against lenders and dealers, it makes sense to develop and implement a one-price policy on dealer reserve.
This may not be a popular opinion, but my mission is not to tell dealers how their processes compare with those of other dealers. Rather it is to advise dealers on how their processes help manage potential risks.
Here are a couple of potential approaches:
The conservative path is to contract everyone at the buy rate or factory incentive rate, recognizing that your finance income will be flats paid by the lender. This requires your finance managers to focus on product sales to continue generating finance and insurance income.
Another approach is to require that everyone be contracted at a consistent spread over the buy rate, unless you are contracting at an incentivized rate. While this may generate more finance reserve, it will be harder to manage.
The Agencies de Federales have warned us twice they are coming. Are we ready?
Gil Van Over is president and founder of gvo3 & Associates, a national compliance consulting firm that specializes in F&I and Sales compliance. He is at [email protected].