Bank turns to flat fee

BMO Harris Bank in Chicago has switched from dealer reserve to a flat fee to compensate dealerships for arranging auto loans.

The fee 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 doesn't pay dealerships for shorter loans.

BMO Harris Bank says it offers loans via new-car dealerships in 25 states but won't say how many stores it does business with. Its outstanding U.S. auto loans averaged $6.5 billion in the fiscal quarter ended Jan. 31. That amounts to a 0.8 percent share of the total U.S. auto loans outstanding at the end of 2013, data from Experian Automotive indicate.

Dealer reserve is the extra interest lenders allow dealerships to tack on to loans as compensation for acting as middlemen. The amount is set by the dealerships. The Consumer Financial Protection Bureau says dealerships' ability to set interest rates results in minorities being charged more. It wants lenders to adopt what it calls nondiscretionary pricing. Last year, Ally Financial paid $98 million to settle discrimination charges levied by the CFPB and U.S. Department of Justice.

The National Automobile Dealers Association says ending dealership discretion is anti-competitive and thus would raise the cost of credit to consumers. NADA attorney Paul Metrey wouldn't comment on the bank's new fee, but he said that, in general, switching to flat fees does not end dealership discretion because flat fees can differ and stores would still choose finance sources.

A BMO Harris Bank spokesman stopped short of linking the switch to a flat fee with the CFPB's demands: "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

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