Auto lenders are sticking to dealer reserve despite the Consumer Financial Protection Bureau's crackdown and despite BMO Harris Bank's recent switch to a flat fee.
That was the buzz at the Auto Finance Risk/Compliance Summit presented by Royal Media Group in California this week, according to a panel member.
The CFPB wants lenders to switch to flat fees or some other form of dealership compensation that gives dealerships no discretion over how much they earn for arranging customer loans. With dealer reserve, a compensation method whereby dealerships add, say, two points of interest to loans, lenders typically allow dealerships some leeway in the amount they tack on. The bureau says dealerships' discretion in setting the dealer reserve leads to discrimination in the form of higher rates for minorities and other protected groups.
"Many big banks have said they are continuing loan participation, notwithstanding Harris Bank," said conference panelist Ken Rojc, an attorney who heads the auto finance group at Nisen & Elliott law firm in Chicago.
Lenders acknowledge they're worried they'll lose business if they switch to fees and their competitors keep paying dealer reserve. So far, BMO Harris Bank appears to be the only lender of any size and scope to break ranks. But lenders are eyeing each other to see who's next, if anyone.