Auto Dealer Monthly Magazine is the daily operations publication serving the retail automotive industry. This automotive publication serves dealer principals, officers and general managers with the latest best practices.
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industry expert / legal A Little Discretion Can be a Dangerous Thing Thomas B. Hudson, Esq. is a partner in the firm Hudson Cook, LLP; the author of four CARLAW® books; the publisher of Spot Delivery®, a monthly legal newsletter for auto dealers; and the editor in chief of CARLAW®, a monthly report of legal developments in all states for the auto finance and leasing industry. For information, call 410.865.5411. THudson@AutoDealerMonthly.com H ow do you establish the finance charge rates your customers pay when they finance their cars through the dealership? If you operate the way many dealerships do, you permit your F&I; folks to "mark up" whatever rate the finance company offers as its "street rate." They probably have the authority to mark that street rate up by different degrees— some customers might have the street rate marked up by half a percentage point, while others might pay a point-and- a-half. That's the discretion referred to in this article's title. Now, discretion is usually an admirable trait, but sometimes its exercise can lead to trouble. For example, what happens if a dealer's F&I; folks exercise their discretion to mark up the street rate in a manner that results in a "protected class" under the Equal Credit Oppor- tunity Act (ECOA) paying higher finance charge rates than non-protected classes? Oops. That's exactly the claim that the Justice Department made against a dealer in a recent case. Unsuccessful at the trial-court level, the United States appealed the dismissal of its complaint for failure to allege a plausible claim under the ECOA against car dealers Union Auto Sales, Inc. and Han Kook Enterprises, Inc. Whew! That was close. The U.S. Court of Appeals for the Ninth Circuit concluded that the United States stated a plausible ECOA claim and, therefore, reversed the trial court's dismissal of the com- plaint against Union Auto. Oops again. The United States' complaint alleged that Union Auto vio- lated the ECOA by instituting a lending policy that allowed sales representatives to add discretionary "overages" to financing contracts, which resulted in a pattern of dis- crimination against non-Asian borrowers. In reaching its conclusion, the appellate court found that the complaint recited the results of the United States' independent analysis of loan files showing that Union Auto's non-Asian borrowers were charged mean overages approximately 35 to 155 basis points higher than Asian borrowers. The court also found these differences were not the result of differences in con- sumers' creditworthiness. The appellate court also found that the complaint's classification of "Asians" and "non-Asians" did not render the ECOA claim any less plausible. According to the court, the "link between names and racial categoriza- tion for the purposes of both anti-discrimination law and discriminatory conduct is well-established, and 'Asian' is a category routinely deployed for the purposes of anti-dis- crimination laws." The appellate court also noted that the fact the complaint pleads discrimination against non-Asians, instead of Asians, is irrelevant. Finally, the appellate court found the trial court was not justified in dismissing the complaint for failing to articu- late a theory of why the sales representatives would give lower loan rates to "Asians." The appellate court noted that under a disparate impact theory, intent is irrelevant, and, under a disparate treatment theory, a plaintiff need only allege that a defendant "simply treats some people less favorably than others because of their race, color, re- ligion, sex, or national origin." Do your dealership personnel have discretion in setting the finance charge rates for your finance customers? If so, you want to be sure that they are not exercising it in such a way as to earn you a visit from the feds. 14