Dealer reserve caps catch on

The notion of capping dealer reserve and documenting exceptions as a way for auto dealers and lenders to avoid possible allegations of discrimination is gaining industry acceptance.

So much so that at least two F&I vendors, Zurich North America and Dealertrack Technologies, are now integrating the approach into the products they sell to dealerships.

The National Automobile Dealers Association made the highest profile endorsement when it recommended the approach in January during its annual convention in New Orleans. Almost immediately, Group 1 Automotive Inc., the nation's fourth-largest auto retailer, said it would adopt the recommendation.

But other industry members have embraced the approach as well, including the National Association of Minority Automobile Dealers and the Association of Finance & Insurance Professionals, which last fall made forms available for dealerships to document exceptions to a fixed cap on dealer reserve.

Some law firms specializing in auto finance and dealership compliance are recommending the approach, too. The Hudson Cook law firm in Hanover, Md., for example, worked with Zurich to come up with software that allows dealerships to track dealer reserve.

Zurich's system can break out reports by individual F&I managers or group customers by credit score and by the amount of dealer reserve they paid, according to Glenn Roberts, national training and business development manager for Zurich.

Dealertrack has offered dealerships an "Exception Rate Justification Form" since last summer. But it's now working to integrate an electronic version of the form into its e-contracting software. That way, the system won't accept a contract unless the form is completed, executives told Automotive News on the sidelines of the NADA convention last month in New Orleans.

Zurich's Roberts said his company has been tracking the Consumer Financial Protection Bureau and possible federal regulation for two or three years.

"It was clear there was going to be more and more scrutiny with the onset of the CFPB, but they didn't have a clear direction," Zurich's Roberts told Automotive News during an interview at the NADA convention. "Now they have really gone into high gear."

The CFPB warned lenders in early 2013 that it would hold them responsible if dealerships were found to have charged minority customers higher rates for dealer reserve than they did customers with similar credit who were not minorities.

The dealer reserve is the small amount of interest lenders allow dealerships to add to the buy rate on a consumer auto loan as compensation for negotiating the loan. The CFPB wants lenders to switch to flat fees or some other form of dealer compensation in which dealerships don't have discretion in setting the rate.

In December, the CFPB and the U.S. Department of Justice signed a consent order with Ally Financial Inc. in which Ally agreed to pay a total of $98 million in restitution and penalties to settle allegations that it had allowed discrimination in letting dealerships set consumers' interest rates. Going forward, Ally agreed to closely monitor finance contracts originated at dealerships, to detect any discrepancies in dealer pricing on loans, and to report regularly to the CFPB.

Ally accepted the consent order but denied tolerating discrimination. It also opted to stick with its existing dealer compensation structure despite the CFPB's desire that Ally and other lenders change their method of dealer compensation.

The approach of capping dealer reserve and documenting exceptions is based on a 2007 settlement between the U.S. Department of Justice and a couple of Philadelphia-area dealerships that were accused of charging minority customers higher rates for dealer reserve. The dealerships agreed to cap dealer reserve and to document pre-approved reasons for any exceptions.

The CFPB has not endorsed that approach. In fact, in a statement following NADA's endorsement on Jan. 24, the CFPB said it still has issues with any dealer compensation scheme in which the dealership has discretion over the dealership's own compensation.

Nevertheless, the concept -- also called the Pacifico approach after one of the Philadelphia dealerships in the 2007 settlement -- is catching on.

F&I trainer and dealership consultant Gil Van Over Gil Van Over, president of gvo3 & Associates in Crown Point, Ind., said at the NADA convention he's a longtime advocate of setting a hard ceiling on dealer pricing. "The key," he said, "is to have it written down, use it and apply it consistently."

You can reach Jim Henry at

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