Super flat finance fees gain traction

For years, auto dealers made money in the finance office by marking up the interest rate on car loans.

But a relatively new finance practice that started with credit unions is gathering steam. Fifth Third Bank, a pioneer of the method, calls it a power flat program.

"We think this is the future," says Kaari Link, national accounts manager for Fifth Third. "Other lenders are offering the dealer a choice between a markup and a flat fee. In our new markets, the power flat is the only choice."

The power flat or super flat, as some call it, is a flat fee of 1 to 3 percent of the amount financed. It typically is higher than the traditional $100 to $150 the lender pays a dealership as an alternative to a rate markup. On a $20,000 loan, a 1 percent flat yields a $200 payment to the retailer.

Without a markup, the customer receives a highly competitive interest rate. And with a healthier flat fee, the dealership also benefits, some dealers believe.

"The super flat does two things," says Jim Farley, lender relations director for Van Tuyl Group, the nation's largest privately held dealership group. "It gives the dealership F&I income and a competitive rate you can pass to the customer."

Going with a super flat reduces the likelihood that the customer will refinance, Farley says. The resulting monthly payment is lower, allowing the dealership to sell the customer more aftermarket products such as vehicle service contracts or tire and wheel protection.

He also says the auto finance business is so competitive these days that it is difficult to profit from rate markups. In some cases the power flat is more profitable than the markup.

Credit unions lead

Typically, captive finance companies don't offer a super flat. But BMW Financial Services doubles the flat fee on subvented loans, dealers say.

Josh Wheelock, finance director for BMW of Austin in Texas, says BMW Financial's fatter flat is likely the result of competition from credit unions, which sometimes offer rates lower than the captive's promotional rates.

Credit unions that offer indirect car loans through dealerships often pay dealers 1 percent of the amount financed.

Banks are new to the game.

"Flats as a percentage of the contract amount surfaced about three years ago," says Nicholas Stanutz, senior executive vice president for Huntington Bank. "In the last six months we began offering them as well, as a way to remain competitive."

Joe Greenwald is marketing vice president for Credit Union Direct Lending, a portal that allows dealers to offer loans through several hundred credit unions. Greenwald says that although some allow interest rate markups, the vast majority of CUDL's credit unions pay dealers 1 percent of the loan balance. Credit unions want dealers to be transparent with their members, he says.

"With a flat fee you have a better chance of closing the deal in a way that makes sense for the consumer," Greenwald says.

Some dealers still prefer a rate markup for handling the financing for car transactions. A 1 percent markup is more lucrative than a 1 percent flat because the markup is 1 percent of the interest charged over the term of the loan.

Publicly held Lithia Motors Inc. often partners with credit unions that pay flat fees, but CEO Sid DeBoer favors a rate markup -- especially if the customer has a tarnished credit history.

Lenders charge higher rates based on risk, and the dealership should be able to cover the cost of getting high-risk customers financed, he says. Risky customers require extra effort in terms of pairing them with lenders and documenting the borrower's ability to pay, he notes.

A flat fee "is no great benefit," DeBoer says. "We don't charge the customer much over our cost anyway."

Forced to flats

But some dealers and bankers say legal pressure could force the industry to replace markups with flats.

"A flat fee that is based on the purchase price would be less susceptible to legal charges of credit discrimination," says Kenneth Rojc, a Chicago lawyer who represents banks and finance companies.

Rojc points out that plaintiff lawyers sued several major lenders a decade ago, contending minorities paid higher finance fees. Lenders entered settlements to cap interest rate markups at 2 to 2.5 percent.

Some states, such as California, have mandated caps on the amount that dealerships can mark up interest rates on auto loans, he notes.

Michael Brown, vice president of operations for Atlantic Auto Group of West Islip, N.Y., likes the concept of a power flat. "I think we are going to see legislation on this anyway," he says. "If banks are taking that step before the legislation is handed down, that's a good thing."

Power of the flat
Choosing a flat fee to handle loans
• Reduces legal risk
• Lessens chances of refinance
• Boosts ability to sell aftermarket products