JIM HENRY

One way to stifle 'predatory behavior'

Automotive News | March 21, 2012 - 12:01 am EST

Is it time to replace the dealer reserve with a flat fee?

Chris Markey, Internet sales and finance manager at BMW of Austin, thinks so.

Dealer reserve “invites predatory behavior,” he said Monday on the sidelines of the Consumer Bankers Association’s “CBA Live” conference in Austin, Texas.

Dealer reserve is where the dealership marks up the interest rate and shares in the profit. That’s how indirect auto loans negotiated at a dealership work, and it’s a key component of dealership profits. While flat fees have been around for years, they’ve never been poised to become the industry standard.

But times have changed.

Dealer groups and lenders are worried because the Federal Trade Commission and new Consumer Financial Protection Bureau are said to be looking at dealer reserve with a jaundiced eye. Customers may not realize that the dealership makes more money at a higher interest rate, the agencies say.

It’s not completely an open season on consumers. In today’s competitive climate, dealerships can’t raise the rate too high without losing the deal. Also, many lenders have a ceiling on how much stores can mark up the rate.

Still, some consumer advocates insist that dealerships should have to disclose precisely how much they make on each loan.

A flat fee can be a token payment from a direct lender, such as credit union. And captive finance companies sometimes pay flat fees on subvented loans, in which there’s no opportunity to mark up the rate. Markey said his dealership has arrangements with banks to pay “large flat fees” instead of dealer reserve.

Markey said he’s really not advocating anything too radical. He said flat fees should be large enough to average out around the same as the average dealer reserve. For example, he said, around $600 instead of the more typical $250. “I don’t think a spread [on the interest rate] does anybody any good,” he said.

Still, Markey acknowledges that most dealers likely would disagree.

He’s probably right.

Jim Henry is a special correspondent for Automotive NewsJim Henry is a special correspondent for Automotive News

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