Retail Front

NADA Tries to Stay Positive


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 making Ally Financial 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 Ally’s agreed-to payout, NADA 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.

NADA 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.



Discuss this Blog Entry 5

on Dec 30, 2013

My beef is with ALLY BANK for not fighting this. Caving in like they did insures that other lenders are already on their knees. Since the government (taxpayers) still owns a substantial portion of ALLY I wonder if that had anything to do with it.

The fact is, neither ALLY BANK nor their dealers forces anyone to agree to a loan they object to. Consumers have the right to shop. If it so happens that a particular "protected class" is made up of generally better or worse negotiators, how can that be a dealer's fault or responsibility? Or a lenders?

This is a perfect example of government run amok. This administration has done some really good things. It has also done some also things. This is in the latter category along with allowing the dealer terminations during the restructuring of Chrysler and GM. I hope this fight isn't over.

on Jan 7, 2014

Ruggles comment give evidence why the industry is in such turmoil regarding the trust or lack thereof, the consumer has in our industry. I do understand dealers are in a position to make money in most activities but should be doing so from an even playing field in the consumers eyes. Forcing a consumer to "shop" for a new car is stress enough then to submit the consumer to unfair business practices adding a finance "holdback" usually determined at the dealer's discretion is absolutely contrary to good consumer relations. Yes you are welcome to blame your government for their attempt to take money out of the dealer and finance coffers, but as a consumer and member of the industry it is only one tiny step to get our industry back to a creditable position with the fair minded consumer. Get out of your hole ruggles, there ain't any light down there!

on Mar 5, 2014

@ Peter - The purpose of being in business is making a return. Perhaps your business can exist without that?

Who forces consumers to shop? Why is it "unfair" for a dealer to make a profit on financing? Do you think consumers have a right to go to the grocery store and buy a gallon of milk at wholesale price?

If consumers, or YOU, want to open a dealership and run it as a public service, feel free. Bring some deep pockets to the table.

You say our industry needs to get back to a "creditable position?" Exactly when was that?

I'd suggest you stay in your position as a lifetime employee. Its safer that way. You continue to let others deal with the realities of the real world.

on Mar 5, 2014

I retract my statement about ALLY Bank, with apologies. They were extorted and had no choice. I see they are adamant about retaining their rate markup system. As I read over Director Cordray's public statement I see CFPB really doesn't understand the indirect lending model. He states ALLY Bank shares in the rate markup with the dealer, which makes the lender "complicit." This is just no true. CFPB needs to talk to its fellow government regulator the FTC, who understands the "risk shifting" arrangement that exists between lenders and their dealers. That arrangement has NOTHING to do with "shared profit."

on Jan 12, 2014

I found it worth noting when, a few years back, BOA said they did not want copies of customer ID's in loan packages. Kind of ahead of the times eh? I have had this discussion many times and it is always going to be arbitrary and subjective when determining the foul here. Anyone ever map credit score distributions and notice any relationship socioeconomically with certain neighborhoods? And as far as the uneducated opinions as to the unfairness of the whole system? What about the 22 years I have spent honing my skill at ferreting out the best deal for both the customer and my dealer? I can make a point on a new car deal and still undercut a customer's own credit union by a point. Is this knowledge and ability worth paying for? I guess we are headed to the point where human ability and interaction count for nothing. I consider it a priority to educate my customers about the whole nasty business and come to an agreement as to what is fair and mutually beneficial. The Government has proven time and again their level of expertise in financial affairs. I predict no consumer benefit from the latest Government tinkering with free enterprise. Boo to ALLY for their timidity.

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What's Retail Front?

Blogs about automotive retailing, commenting on news impacting the business of selling vehicles.


Steve Finlay

Steve Finlay is the editor of WardsAuto Dealer Business magazine and a senior editor for His journalism career started 42 years ago as a crime reporter. A Michigan native, he likes...

Jim Ziegler

Jim Ziegler, president of Ziegler Supersystems, is a trainer, commentator and public speaker on dealership issues.
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