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The Canary in the Mineshaft for Discretionary Pricing?


Originally published in August 2021.


Today we’re going to talk about the Canary in the Mineshaft. Spoiler alert: it looks like that canary is dead.


Discriminatory Pricing


Today’s topic is prompted by an email message we received from an F&I agent in New England. He alerted us to the recent action by the Attorney General of Massachusetts, who delivered letters to at least two dealers in that state alleging that the dealers are “charging discriminatory, higher prices to Black and Latinx customers for goods and services sold” by the dealers, “as measured by the statistically significant higher markups Dealer charges Black and Latinx customers compared to white customers.”


This is interesting for several reasons. First of all, we’ve seen this movie before. This is exactly the language the CFPB used during the Obama Administration to justify its negative attitude towards finance reserve. Later in that administration, the CFPB used similar logic to indicate its interest in restricting discretionary pricing of F&I products.


Things have been quiet for about four years on that front, but this state-level enforcement action, essentially following the CFPB playbook, can be considered an indicator of things to come – a canary in the mineshaft, as it were.


Like the CFPB, the Massachusetts Attorney General’s office does not suggest any actual proof of discrimination. As you recall, credit applications do not – cannot – indicate an applicant’s race. Race is not a legal consideration for making credit determinations, and shouldn’t be. But this means the Massachusetts AG is assuming what an applicant’s race is based on assumptions related to surname or address. In other words, Big Brother is guessing.


Discretionary Pricing


Discretionary pricing, whether in finance reserve or aftermarket products, is a fact of life in the retail automotive industry. Higher mark-ups above buy rate may be counterbalanced by trade allowance or F&I product purchases. A deal with a higher than average price for a vehicle service contract may have a higher trade allowance and thus a lower total cost and monthly payment. Facing potential liability because one variable is higher than the norm should give a prudent dealer pause. So what’s a dealer to do?


Model Policies


The National Automobile Dealers Association has crafted two model policy documents, one addressing mark-ups over buy rate in the finance arena, and the other dealing with voluntary protection products, or what we used to call F&I products. These policies are conservative and should provide a dealer with an excellent line of defense.


If your dealership has a higher risk tolerance, policies that permit an acceptable range of mark-up on rate, or profit on product, may be the way to go. Consult your local attorney and dealers association to see what options are out there.


But here’s the takeaway: When the canary in the mineshaft dies, it means there is a danger for the miners. The recent action of the Massachusetts Attorney General suggests the gloves are off in that state, and this may reasonably be assumed to be spreading to other states and at the federal level. If you don’t have policies and training in place that address discretionary pricing and its limits, now is the time to do so. The canary is already dead.

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