Editor's note: This blog has been amended to clarify NADA's basic position on flat fees and how dealers would be incentivized to choose lenders.
The National Automobile Dealers Association has tried for months to impress upon the Consumer Financial Protection Bureau that switching from dealer reserve to flat fees will not eliminate dealerships’ ability to set their compensation for auto loans.
But it’s debatable whether the message is sinking in.
“You can’t eliminate discretion by going to a flat fee,” says Paul Metrey, NADA’s chief regulatory counsel for financial services, privacy and tax.
Last week NADA distributed a memo to its members and the press called “The Fallacy of Flats.” The basic argument -- which NADA introduced in November at an auto finance forum hosted by the CFPB -- is that even if all lenders switched to a flat fee, dealerships would be incentivized to choose lenders based on which pays the highest flat.
The CFPB isn’t allowed to regulate franchised dealerships, but it does regulate lenders. The bureau holds lenders accountable for allowing dealerships discretion in setting dealer reserve, a small amount of interest -- typically up to 3 percentage points -- that dealerships can tack onto the lender’s buy rate on an auto loan for acting as a middleman.
The CFPB thinks dealerships take advantage of that discretion to charge minorities and other protected groups extra, which NADA denies. As an alternative, the CFPB wants lenders to switch to flat fees, a fixed percentage of the amount financed, or some other form of compensation that the CFPB considers nondiscretionary.
Metrey told me in a phone interview last week that while flat fees might protect lenders against discrimination charges from the CFPB, they wouldn’t protect dealerships from discrimination charges by the regulators that oversee them, such as the Federal Trade Commission and state attorneys general, or by private individuals. For that matter, Metrey said, flat fees wouldn’t protect consumers from hypothetical discrimination, either.
NADA is advocating that lenders stick with dealer reserve. But it says dealerships should set a ceiling for dealer reserve and go lower only when it has a legitimate business reason to do so, such as to match a competitor’s offer.
Nearly every sizable auto lender is sticking with dealer reserve -- so far.