Pub. 20 2021-2022 Issue 1

Managing Pricing Discretion in Credit Transactions A Path Forward

Managing Pricing Discretion in Credit Transactions: A Path Forward

This story appears in the
New Jersey Auto Dealer Magazine
Pub. 20 2021-2022 Issue 1

One of the most attractive benefits to consumers in any industry is the ability to purchase products and services at a discounted price. Discounting saves customers money, allows companies to earn their business, and disciplines competitors’ prices for the same products. In a normally functioning market, it is a win-win for both consumers and businesses.

At the same time, discounting involves pricing discretion, and pricing discretion that is not carefully exercised can give rise to concerns about arbitrary pricing and, worse, pricing that discriminates against protected groups of consumers. This concern has driven the efforts of many consumer advocates and government officials over the years to eliminate dealer pricing discretion. In the context of dealer financing, this would be attempted by removing the dealer participation that dealers earn for originating credit contracts and replacing it with a non-discountable, flat fee.

Many finance sources that are assigned credit contracts compensate dealers with non-discountable flat fees. The National Automobile Dealers Association (NADA) takes no position on the form of compensation freely entered into by dealers and their finance sources. Nevertheless, NADA has resisted — and will continue to resist — efforts by the government to prohibit finance sources from compensating dealers with discountable dealer participation for originating credit contracts with their customers. The pro-competitive benefits that dealer participation provides to consumers should not be eliminated by unwarranted and untested government intrusion into the marketplace.

Notwithstanding the flaws of such a mandate, concerns about “unfettered” pricing discretion that have been expressed by the Federal Trade Commission (FTC) and others should not be ignored, and dealers should consider ways to address those concerns while striving to provide their customers with affordable and competitively priced products. One approach a dealer should consider to fulfill this goal (managing discretion while promoting competition) when earning dealer participation in a credit contract is to adopt the optional NADA/NAMAD/AIADA Fair Credit Compliance Policy & Program.

The NADA Fair Credit Compliance Program was not developed in a vacuum. Rather, it stems from — and fully adopts — an approach to fair credit compliance outlined in consent orders that the Department of Justice (DOJ) entered into with two automobile dealerships to settle pricing discrimination claims in 2007.

In those consent orders, the dealers were required to adopt “Guidelines for Setting Dealer Reserve” in which the dealer established a standard dealer participation rate (SDPR) that is included in credit offers to consumers (i.e., the dealership would offer an APR that is the sum of the wholesale buy rate offered by the finance source and its SDPR) unless a “good faith, competitive reason” that supports a lower dealer participation rate was present in the transaction. The consent orders included seven legitimate business reasons for discounting the SDPR. The three most common were the presence of a lower cap imposed by the finance source, a consumer’s monthly budget constraint, and a consumer’s access to a more competitive offer. The consent orders further required any deviations from the SDPR to be recorded on a pricing certification form, reviewed by the general manager or his or her designee, and retained by the dealership.

In November 2013, while speaking at a Consumer Financial Protection Bureau (CFPB) Auto Finance Forum, a senior DOJ official validated this approach when explaining that —

(i) the Equal Credit Opportunity Act does not prohibit pricing discretion;
(ii) however, when exercised, pricing discretion presents a fair lending risk that needs to be managed; and
(iii) one way to manage that risk is to adopt the approach outlined in the 2007 DOJ consent orders.

Two months later, after extensive review by dealer principals, general managers, finance managers, finance trainers, dealer attorneys, finance sources, automotive trade association executives, former regulators and others, the three national trade associations representing franchised automobile dealers released the NADA Fair Credit Compliance Program.

As noted above, the program fully adopts the framework established in the DOJ consent orders and builds on it. A dealer who adopts the program has it approved by its board of directors and appoints a senior dealership official to serve as the Program Coordinator (PC). The PC oversees the program’s implementation and maintenance by establishing the SDPR, conducting initial and periodic training, reviewing pricing certification forms, submitting an annual compliance report to the board, and performing other related tasks. The program explains each of these steps in detail.

Since its inception, the NADA Fair Credit Compliance Program has gained widespread support from many prominent observers both within and outside of the industry, including the American Bar Association, which overwhelmingly approved a resolution at its 2020 annual meeting that, in part, urges governments at all levels to offer “a safe harbor against pricing discrimination claims for dealers that faithfully implement the NADA/NAMAD/AIADA Fair Credit Compliance Policy and Program.” A CFPB Taskforce on Federal Consumer Financial Law made a similar recommendation to the CFPB and the Federal Reserve Board in January 2021.

The FTC has also seen value in this approach to managing pricing discretion. It included the framework and many NADA Fair Credit Compliance Program elements in a May 2020 consent order it entered into with an automobile dealership to settle allegations of intentional credit discrimination.

Notwithstanding its broad support, the NADA Fair Credit Compliance Program remains optional. Its adoption does not guarantee that a dealer will be protected from liability for a fair credit violation. However, if faithfully adopted, implemented and maintained, the NADA Fair Credit Compliance Program provides a dealer with a well-regarded path forward in a very challenging environment. This should not be overlooked when a dealer discusses with its attorney how it will ensure the fair and lawful treatment of its customers.

This article is offered for informational purposes only and is not intended as legal advice.

Paul D. Metrey is the Vice President, Regulatory Affairs and Chief Regulatory Counsel, Financial Services, Privacy, and Tax for the National Automobile Dealers Association. He can be reached at Learn more about the NADA Fair Credit Compliance Program at