Law Suits Making 3% Caps Norm for Dealers

A rash of minority-discrimination lawsuits against financial services institutions, including captive lenders, has caused a wider-spread capping of the dealer reserve margin on vehicle purchaser loans at a 3% point level.

The suits date to 1999 and charge that some dealers, with approval of their lenders, charged as much as 10% for the reserve, a dealer add-on to higher-risk vehicle loan rates.

A settlement this spring in Nashville, TN, of the first suit (against Nissan Motor Acceptance Corp.) reinforced the 3% cap as the maximum dealers may assess on loans.

Nearly 90% of banks cap dealer reserves at 3% — and some reduce the cap to 2% on loans exceeding five years, says Nicholas Stanutz, executive vice president-consumer credit administration at Consumers Bankers Association.

The 3% level is not new. Even before suits were filed against the Big 3 captive lenders, and those of Nissan and Toyota, the loan arms of Subaru and Volvo enforced caps of 3%. Big 3 lenders adopted the 3% cap in 2002, as did Toyota Financial Services and Honda Financial Services.

This year, the 3% cap became a policy of BMW Financial Services, Hyundai Motor Finance and Mazda American Credit. Mitsubishi Motors Credit is reportedly considering lowering its cap from 4% to 3%, as well.

Most lenders no longer split reserves with their dealers, says Stanutz, so as to avoid potential exposure to damages from minority-bias suits.