The so-called dealer-reserve or dealer-markup system ducks a bullet. But the gun isn’t empty.
The National Automobile Dealers Assn. tried to find better-than-bad news in an otherwise ominous development for the trade group and its membership.
The federal government is makingFinancial pay $80 million in restitution and $18 million in fines because some of the auto-lending giant’s dealer clients allegedly charged higher loan rates to African-American, Hispanic, Asian and Pacific Islander car buyers.
After criticizing the U.S. Consumer Financial Protection Bureau for its pivotal role in’s agreed-to payout, says it is encouraged the government’s announcement “does not mandate any form of a dealer flat-fee compensation system.”
Well, not yet anyway. It seems not a matter of if but when flat fees or something like them will push aside the dealer-reserve system, the prevalent way in which dealers are compensated for arranging auto financing between lenders and consumers.
calls it a system that’s worked for 100 years. But it’s causing a lot of controversy lately.
Most new-car buyers obtain indirect financing at the place of purchase. The dealership, acting as a middleman, sets up a loan through one of its lending partners. The lender offers a wholesale “buy rate” to the store that typically adds a percentage point or two to the rate offered to the consumer.
That add-on is called various names besides the rather innocuous dealer reserve. CFPB and others describe it as a dealer markup. Some consumer advocates brand it as a ripoff.
Whatever it’s called, CFPB says it breeds the possibility of “disparate impact,” or dealers charging higher loan rates to minorities.
“Whether or not Ally consciously intended to discriminate makes no practical difference,” says CFPB Director Richard Cordray. “In fact, we do not allege that Ally did so.”
But the bureau’s case claims 235,000 minority borrowers paid higher rates, and Ally didn’t do enough to stop that from happening.
A government-induced payout of nearly $100 million – the largest-ever in an auto-loan discrimination claim – has a way of getting a lender’s attention. Ally is rethinking dealer reserve. So are other lenders. If they conclude the compensation system puts them at risk of paying massive discrimination fines and fees, say so long to dealer reserve.
Ally is working with the government “to monitor dealer markup in order to prevent future discrimination or will seek to eliminate dealer markups altogether,” Cordray says.
That last part is telling. NADA may find some consolation dealer reserve didn’t get done in right now. But the end seems near.
“Markups can generate compensation for dealers while giving them the discretion to charge consumers different rates regardless of consumer creditworthiness,” CFPB says in a statement.
NADA presents a valid point about exactly how the government determined how dealers discriminated against nearly a quarter of a million borrowers. CFPB vaguely says it is the result of an examination that began in 2012.
“The CFPB continues to withhold the secret methodology it uses to determine whether unintentional discrimination has occurred,” NADA says. “The public still does not know whether the bureau takes into account legitimate factors that can affect finance rates.”
All sorts of things go into determining those, including credit history, debt-to-income ratio, down payment, trade-in value and customer negotiating skills. Some consumers don’t know they can bargain loan rates, not just vehicle prices.
“The unspoken truth here is that some people pay more because they don’t negotiate well or are uninformed,” says a veteran dealership finance manager. “I find it difficult to believe protected classes are rife with these handicaps, and are therefore easily preyed upon.”
NADA says it backs fair-lending laws and opposes discrimination in the marketplace. It seems dead serious about that. But the CFPB appears serious about killing dealer reserve, one way or another.