BMO Harris Bank switches to flat fees in fair lending push

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Editor's note: An earlier version of this story misstated the minimum term for BMO Harris Bank's new flat fee program. The minimum term is 36 months.

BMO Harris Bank in Chicago has switched from dealer reserve to flat fees as its method of compensating dealerships for arranging auto loans.

The bank said that beginning last week its new flat fee for dealerships is 3 percent of the amount financed, up to a maximum fee of $2,000, for contracts that are 36 months or longer. The bank offers shorter term loans but doesn’t pay dealerships a fee for those, a spokesman said.

Experts say the bank, which offers auto loans via franchised dealerships in 25 states, could be the first auto lender of appreciable size and scope to change to flat fees since the Consumer Financial Protection Bureau started campaigning last year to eliminate dealerships’ ability to set varied rates for dealer reserve.

The dealer reserve is an amount of interest that lenders allow dealerships to add to the buy rate on an auto loan for acting as middleman. The bureau says that varied rates result in minorities and other legally protected classes of borrowers being charged more.

The bank’s outstanding U.S. auto loans averaged $6.5 billion in the fiscal quarter ended Jan. 31, up from $5.6 billion in the year-earlier period. A spokesman wouldn’t disclose how many U.S. dealerships the bank does business with.

BMO Harris Bank has branches in nine states in the Midwest, Southwest and Florida but offers auto loans beyond its branch-office footprint. Parent company BMO Financial Group is based in Toronto and does business as the Bank of Montreal.

‘Encouraging’

CFPB Director Richard Cordray praised BMO Harris Bank’s action in adopting flat fees. “It is encouraging to see BMO Harris taking this proactive step to protect consumers from discrimination,” Cordray said in a written statement on Tuesday.

Ira Rheingold, executive director of the National Association of Consumer Advocates in Washington, told Automotive News that BMO Harris Bank could start a trend. “I would hope and expect other lenders would do it,” he said. “I think the writing is on the wall in terms of their ability to prevent discrimination.”

The CFPB has tried to get lenders to switch to flat fees or some other form of dealership compensation that takes pricing discretion away from dealerships since March 2013, without apparent success until now.

The National Automobile Dealers Association has contended throughout that eliminating dealership discretion is anti-competitive and would inadvertently raise the cost of credit to consumers. NADA also denies its members tolerate discrimination.

NADA wouldn’t comment directly on the move by BMO Harris Bank. However, NADA attorney Paul Metrey said that in general, switching to flat fees does not eliminate dealer discretion, because flat fees can differ and dealers would still have to choose finance sources.

In addition, he told Automotive News today that flat fees might reduce fair credit risk for the lender, but not for the dealer or for the consumer. Metrey is NADA's chief regulatory counsel for financial services, privacy, and tax.

He also said he wasn’t aware of any other sizable auto lender that had switched to flat fees.

Auto lenders had been sticking with dealer reserve. Even Ally Financial Inc., which paid $98 million to settle discrimination charges levied by the CFPB and U.S. Department of Justice late last year, opted to stay with dealer reserve rather than switch to flat fees or some other form of dealership compensation.

In January, Ally CEO Michael Carpenter said the company’s stance was motivated in part by the concern that switching to flat fees would cause dealers to steer their business to other lenders.

Greater consistency

Cordray said in his statement Tuesday that the CFPB “does not mandate any specific form of dealer pricing and compensation.” However, the bureau does want lenders to adopt what it calls nondiscretionary pricing.

A BMO Harris Bank spokesman stopped short of linking the switch to flat fees with the CFPB’s demands.

“We believe the new guidelines create greater pricing consistency at the dealer level and demonstrate the Bank’s deep commitment to fair lending,” spokesman Patrick O’Herlihy wrote in an e-mail on Tuesday.

“We consider a variety of factors before making any changes to our services and products. The evolving regulatory environment would be one of those considerations.”

You can reach Jim Henry at autonews@crain.com.

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