The Continuing Threat to Dealers

In the past number of years, there have been governmental prosecutions against dealers and financing sources. In addition to these prosecutions, there have been announced policy objectives by leading government bureaucrats to extirpate discrimination. There appears to be a relentless effort to pursue the ambitions of DEI – discrimination, equity and inclusion.

Bureaucrats Speak

One need only reflect upon the statements of key federal bureaucrats to assess the legal risk regarding this issue. For example, Rohit Chopra, the director of the Consumer Financial Protection Bureau, said in May 2020 concerning a CFPB case: “…today’s action marks the beginning of more date-driven detection of discrimination and a systemic approach to protecting Americans from auto market abuses.”

In addition, Federal Trade Commission Commissioner Rebecca Kelly Slaughter vowed about the reserve: “The policy of permitting unfettered discretionary dealer markup leads to the same racist result, whether or not discriminatory intent is involved.”

These statements illustrate an animus against dealers vis-à-vis the issue of alleged discrimination.  

Disparate Impact Cases

With the advent of the CFPB in 2011, discrimination became a key issue.  The bureau shortly thereafter prosecuted cases against major financing sources, such as GMAC/Ally, to discipline dealers utilizing a statistical methodology in an attempt to demonstrate disparate impact discrimination.

Recent FTC and Attorney General Cases

In the past two years, the FTC has successfully prosecuted cases against three dealers for millions of dollars, with discrimination being a central allegation: Passport Automotive Group, Ed Napleton Automotive Group and Bronx Honda. The Illinois Attorney General’s Office was a joint plaintiff with the FTC in the Napleton case. In January 2023, the Massachusetts Attorney General sued a dealer regarding discrimination concerning voluntary protection products.

These cases exhibit the immediacy of this threat.

Discrimination Theories

To state the obvious, discrimination is illegal based on numerous laws, the Equal Credit Opportunity Act being the most prominent. All aspects of discrimination are subject to action, including verbal and written statements, which includes advertising. 

Favored theories of regulatory action are disparate impact and disparate treatment. Disparate treatment occurs when a creditor treats an applicant differently based on a prohibited basis. It can be identified by contrasting the treatment of the pool of applicants. Disparate impact occurs when a creditor employs facially neutral policies or practices that have an adverse result on members of the protected class unless there is a legitimate business need which can’t reasonably be achieved by means that are less dissimilar in their effect. It can, obviously, get complicated.

A New Tool for Enforcement

A new approach to enforcing discriminatory practices can be advanced by applying the concept of unfairness. Unfairness is a flexible term captured in law to police unconscionable merchant commercial practices. It was never intended to be applied to disciplining discriminatory practices. However, in March 2022, the CFPB announced its intention to use its authority to prosecute discrimination as an unfair act or practice in financial services.  How this novel concept will ultimately apply to dealers remains unknown.  

Observations and Recommendations

Discrimination prosecutions are a grave threat to dealers. Dealers should contemplate how to corral these risks in determining the interest rate and the pricing for voluntary protection products. Programs advocated by NADA, such as the Fair Credit Compliance Policy & Program and Voluntary Protection Products: A Model Dealership Policy should be implemented. In brief, these programs provide that the store applies the same beginning rate or price to each customer, and then, if appropriate, modify it based upon legally sanctioned conditions. These protocols are a defense against allegations of discrimination.

Dealers should be cognizant of the fact that once they are targeted for discrimination, the proof of discrimination is often based upon a statistical analysis which is quite difficult and expensive to rebut. A relatively simple protocol when engaging in transactions with customers can prove invaluable.    

Terry O’Loughlin is director of compliance for Reynolds & Reynolds and is admitted to the Pennsylvania and Florida Bars. Before joining Reynolds, he was employed by the Florida Office of the Attorney General, where he investigated automobile dealers and financing sources. He previously was a public accountant.  

Originally posted on F&I and Showroom