Fight Flat Fees for Auto Financing

Industry publications are writing with increasing frequency about the potential demise of so-called dealer markups, the percentage-point fees dealers charge for acting as middlemen for consumer auto loans.

Proponents of flat fees say the “markups” are unfair. They are urging regulators, such as the federal Consumer Financial Protection Bureau and the Federal Trade Commission, to take action. 

What effect would a flat-fee requirement have? Like any mandated change in the way an entire industry operates, it is hard to predict the impact clearly. But that is the problem. No one knows the ultimate outcome, and bad results with real damage to the car-retailing business are likely.

To begin, “markup” is an incorrect and derogatory label based on the false assumption that wholesale loan rates available to dealers because of their relationships with finance sources are available to consumers without the work of dealer personnel.

We really are discussing dealer reserve, a term that derives from the early practice of finance sources depositing dealer profit on financing into an account to be released as loans were paid off. Today, payments to dealers simply are advances against those reserve accounts.

So what are the risks from elimination of the reserve system?

The present system gives dealership finance and insurance representatives incentives to fight for the lowest wholesale rate qualification for a customer so that the quoted dealer rate will be more favorable.

A flat fee is just that: a fixed amount, regardless of the rate the customer pays, and it may reduce an F&I manager’s incentive to fight for the lowest wholesale rate for a customer. That could cause higher consumer finance rates, with a negative impact on sales.

Reduced incentives to work to qualify a customer for financing actually could make it harder for credit-challenged buyers to purchase cars. That affects not only those buyers, but also dealers, auto makers and lenders.

The case against “mark-up” is built on the false premise that dealers act like home-loan brokers, who bear much of the blame for the recent financial meltdown. But a home-loan broker works to sell the loan itself. 

Once that loan is assigned to a lender, the broker walks away with no further responsibilities. Dealers sell vehicles, and they offer indirect financing to facilitate those sales.

Dealers are accountable for how they sell and finance vehicles for years after the transactions, so they are nothing like home-loan brokers. Ironically, however, flat fees that may make it easier to sell car financing over the phone or online could lead to the type of brokering that was so detrimental to the mortgage market.

But what about discrimination and other problems consumer advocates have complained about for years? Like other parades of horrors offered by dealer detractors, the problems of the reserve system are anecdotal and based on outdated information that no longer is accurate because of finance-source limits and improved desking and selling practices.

If a change to the system is so potentially problematic, wouldn’t finance providers and others defend the system?  Don’t expect that.

Finance sources can live with flat fees because they may make compliance with non-discrimination testing easier. And finance sources like the ability to set customer rates.

Auto makers may seek to protect their captive financing units that have the same interests as other finance sources.

Online companies may see flat fees as making it easier to sell finance and ancillary products online, and that is to their benefit.

That leaves dealers themselves as the ones who must defend the present system. National and state dealer associations are telling the story of why today’s finance system works. They need your support.

It would benefit dealers when talking to legislators, policy makers and journalists to explain why the reserve system leads to lower rates for customers and increased sales for the auto industry.

A government-mandated change in the way an entire industry does business will have effects no one can anticipate. With the huge potential for negative fallout from the imposition of flat fees, that is too big a chance to take with the entire retail-car business at stake.  

Michael Charapp is a lawyer who represents auto dealers. Based in McLean, VA, he is at (703) 564-0220 or [email protected].