CFPB Brings The Hammer Down On Captives, Dealer Reserve

by Cameron Aubernon

Published: September 30th, 2014

cfpb brings the hammer down on captives dealer reserve

The hammer has fallen on captive automotive lenders, such as GM Financial, Ford Motor Credit and Toyota Financial Services: The Consumer Financial Protection Bureau began officially asserting its authority over them as the feds and the lenders battle over allegations of discrimination in the latter’s loan products.

Forbes reports the captives — regulated at the state level until this month — will be used indirectly by the agency to regulate dealerships as far as financing is concerned; the new-car dealer lobby won exemption from oversight in 2010.

The focus? Dealer reserve. Lenders allow dealers to add a few percentage points to the former’s loan packages as compensation for generating the leads, generally capped between 2 to 3 percentage points by most lenders. However, the allegations claim dealerships use their dealer reserve to charge more on loans made to protected classes, such as women and minorities.

The CFPB plans to address the issue by “pushing lenders to switch to some form of dealership compensation that takes away dealer discretion, such as a fixed, flat rate for every customer.” The agency also suggested lower caps could also do away with the alleged variations in dealer pricing.

For its part, the National Automobile Dealers Association claims competition “keeps rates low,” that dealership compensation is lower than the rate caps suggested, and by moving to a fixed, flat rate with even lower caps, dealers would no longer be able to offer discounts on financing.

#AutomotiveFinancing #CaptiveLenders #ConsumerFinancialProtectionBureau #DealerReserve #Discrimination

Cameron Aubernon

Seattle-based writer, blogger, and photographer for many a publication. Born in Louisville. Raised in Kansas. Where I lay my head is home.

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13 of 51 comments

Xeranar on Sep 30, 2014

I don't care to push into this crowd but I shall offer a simple view. What business is it of the dealership to get interest on a loan they do not own or have any interest in? A dealership is paid by the bank for the product I buy. It is in their business interest to help me finance a product for convenience. So why exactly is giving them 1-3 percentage points part of the transaction cost? Regardless of the 'shop around' mentality which is flawed because of the inherent nature of monopolization and cartels (which they banter about frequently but fail to understand the terminology) the system should never have rewarded them with points in the first place. A flat fee should have been sufficient and they should have been thankful for that since ultimately the citizen is the one paying for these even as the businesses give each other profit on the back end.

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- 28-Cars-Later on Sep 30, 2014
  
  This behavior has been going on for some time, banks used to give a several hundred dollar bonus ($400-600 IIRC) to my dealer when a loan was sold through them (PNC comes to mind). Whether these were points on the loan I honestly cannot be sure because I wasn't doing F&I. I was under the impression this was an incentive from the bank to use them over their competitors, and it had nothing to do with "protected classes" the bonuses were based on the loan amount and which bank was used. This bonus was among a number of variables which determined the final price, along with trade and any negotiating by the buyer. I'm not sure what's going on in the industry today, but its possible the "protected classes" are engaging in loans for product they cannot afford more frequently and are perhaps getting clobbered on interest due to credit history, but I am only speculating.
  
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- Highdesertcat on Sep 30, 2014
  
  @28-Cars-Later I agree with 28-Cars-Later. I have known this behavior to be Standard Operating Procedure (SOP) for the more than 30 years that my four brothers were in the multi-brand new and used car retailing business. It's business as usual for most dealerships and there are tons of money to be made from kickbacks, preferential lending referrals, preferential insurance referrals, etc. In many cases, the bonus that 28-cars-Later refers to, offset the commission the dealer had to pay the salesman and/or bird-dogger. One way to get around all that is to pre-arrange your own financing and insurance through a reputable shareholder-owned credit union like NavyFed or Pentagon FCU, or USAA. Dealers HATE that because they can't make any money on that arrangement.
  
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- Krhodes1 on Sep 30, 2014
  
  @HDC Don't they though - the F&I guy at the dealership where I bought my Saab in '09 nearly scuppered the deal being such a pill over the fact that I had my own pre-arranged financing. All I needed was the official amount for the check so I could have it cut, drive down, and pick up the car (it was 125 miles away). F&I guy dragged it out for hours. I finally called my salesman, told him he had 5 minutes to get me the number, or the deal was off, I was tired of talking to the douchebag. Then when I got there they kept me waiting for a few hours to sign the paperwork. Maddening, but I did get more than $13K off the price of the car, so worth a bit of hassle.
  
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- Xeranar on Sep 30, 2014
  
  @highdesertcat I agree it is nice to be able to bring in your own financing. I did that with my parent's help on my Scion and it took several hours to unravel the F&I guy to accept that. He even set the paperwork in front of us with their own higher percentage on it claiming it was our paperwork. For a time he even claimed he couldn't process it for legal reasons, it was so hilariously stupid and would have genuinely been funny if it wasn't just stress on my heart I didn't need. I actually don't want this to be combative with you HDC, but your response is normative. There isn't a good reason I can see of why this is accepted practice except that it is essentially legal and the monopoly refuses to move on it. It sounds like a time for regulation to end the practice all together.
  
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El scotto on Sep 30, 2014

The B&B are a pretty sharp bunch. They've been to the financing rodeo more than few times. What comes to mind is the car dealers advertising: "Got a job?, got a a few hundred dollars?; bring in two pay stubs and a utility receipt and we can get you into a new car!" The CFPB is looking to protect those consumers; the ones basically living paycheck to paycheck, and finacially not savvy. If the CFPB wanted to help (and use common sense) they should put some sort of "Places to get a car loan" kiosk/carborad display in every dealership. That should please both the fans of Rachel and Rush.

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Kjb911 on Sep 30, 2014

Why isn't the CFPB investigation the predatory lending of Buy Here Pay Here giants and the companies like Credit Acceptance Corp. Every time I have a customer come in with a loan from Credit Acceptance on a 2005 Malibu with 183K and a payoff of $12,322.00! One of the bigger buy here pay here around my area (Shannon Motors) has even begun offering leases on used cars. 455 a month for a 2008 Cobalt LS with 122K...yea that happened the other day/

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- 28-Cars-Later on Sep 30, 2014
  
  Unconscionable.
  
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- Krhodes1 on Sep 30, 2014
  
  The problem is there has to be something actually illegal that they are doing. You can charge outrageous rates as much as you want, as long as you charge everyone FAIRLY. You can't charge white guy with 500 credit score 15% and black guy with 500 credit score 22%. Or single Mom with 500 credit score 26%. But you can charge everyone 26%, if that is allowed in your state. I agree that the whole BHPH and paycheck loan industry needs a lot more scrutiny, but I also think the alternatives are probably worse. Better to pay too much or have your bad credit made worse than to have Guido break your legs.
  
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- Landcrusher on Sep 30, 2014
  
  @krhodes1 Not that I really care anymore, but the credit scores are just stupid. If you want to mandate things based on the scores then the scores need to be utterly transparent and reflect only failure to pay. False claims of bad behavior need to be damages to be reclaimed in court. And finally, ability to pay needs to be a separate issue altogether.
  
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- Xeranar on Sep 30, 2014
  
  @Landcrusher This I can agree with LC. The problem with credit scores now is that it isn't just the big-3 who manage them. Most private insurers, lenders, and actors are producing their own 'score' based on the scores they receive and wholly proprietary market data. Race is certainly an issue within them, so is location, and education. You can have a PhD but live in a red-line district (like I do effectively in Pittsburgh) and you'll be given higher interest rates by most groups.
  
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- Landcrusher on Oct 01, 2014
  
  @Xeranar Is there any proof of them using race as a data point or is this just something that somebody surmised? I would love to throw that sort of thing at my useless congressman.
  
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Dwford on Oct 01, 2014

The idea that dealership finance guys are discriminating against women and minorities and charging them higher rates than white males is ludicrous. They are discriminating against people who don't realize they can negotiate the rate, and any finance guy would happily charge the rate markup to a white guy just like anyone else. That's how they make their money. No finance guy is going to purposely make less just because a white male sits down in front of them.

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