Dealers are responding well to flat fees, BMO Harris says

It’s early yet, but BMO Harris Bank in Chicago says its ties with dealers haven’t suffered since it switched from dealer reserve to a flat fee to compensate dealerships for arranging auto loans.

The move, made nearly three months ago, is being closely watched by auto retailers and lenders.

The bank switched to flat fees on April 24 to stay ahead of pressure on lenders from the Consumer Financial Protection Bureau, which says dealer reserve can result in discriminatory pricing on auto loans.

Dealers have reacted positively to the switch, BMO Harris Bank spokesman Patrick O’Herlihy says.

“We’ve spent a lot of time helping our dealer customers understand and manage this change, and the feedback so far has been positive,” he told Automotive News in an e-mail late last month.

“Specifically, many of them have told us that they appreciate that this change has created a simpler and more transparent financing process.”

Go-to lender

Ewald Automotive Group, a dealership group headquartered in Milwaukee, still ranks BMO Harris Bank among its go-to lenders for customer financing.

“In terms of the changeover, based on the first eight weeks or so, it seems not to have had too much effect on the F&I office,” says Ed Fried, CFO for the group, which sells vehicles from the Detroit 3 and Kia at six locations throughout southeast Wisconsin.

Fried says the group’s new and used retail volume is up overall, and the share of business it sends to BMO Harris Bank is flat or even slightly higher. He won’t disclose specific numbers but says BMO Harris Bank is among the top three lenders for retail business at the group’s dealerships. Ewald Automotive Group also uses BMO Harris Bank for floorplan financing, he says.

“There’s a strong captive finance company in every store, whether it’s Ford Credit or Kia” Motors Finance, Fried says. The captives are typically every dealership’s No. 1 lender, he says. “But BMO is definitely right up there.”

O’Herlihy of BMO Harris Bank says the bank doesn’t disclose detailed information on auto loans. But he says auto lending “has been a growing segment for us.”

During the second fiscal quarter that ended April 30, only a week after BMO Harris Bank switched to flat fees, the bank’s outstanding U.S. auto loans rose to $6.7 billion from $5.8 billion in the year-earlier period, an increase of nearly 16 percent.

BMO Harris Bank makes indirect auto loans through U.S. dealerships in 25 states. Its biggest presence is in Illinois and Wisconsin. Other states it considers core are Indiana, Kansas, Missouri, Minnesota, Arizona and Florida. Its parent company is BMO Financial Group in Toronto.

In April, BMO Harris Bank said that its new flat fee for dealerships is 3 percent of the amount financed, up to $2,000, for contracts that are 36 months or longer. The bank offers shorter loans but doesn’t pay dealerships a fee for those.

Regulatory environment

Other lenders have said they won’t adopt flat fees for fear dealerships would steer their business to another lender that pays dealer reserve. Dealer reserve is the extra interest lenders let dealerships tack on to loans as compensation for acting as middlemen. The amount is set by dealerships. Dealer reserve is usually capped at 2 or 3 percentage points, but in practice dealerships usually earn less than that.

The CFPB says that dealership discretion in setting dealer reserve is an invitation for dealerships to charge higher rates for legally protected classes of borrowers such as minorities and women. The CFPB wants lenders to switch to flat fees or some other form of dealer compensation that, in the CFPB’s view, would eliminate dealer discretion.

The National Automobile Dealers Association objects on several grounds, starting with rejecting the notion that its members tolerate discrimination. It also maintains that even if all lenders switched to flat fees, it wouldn’t eliminate the potential for discrimination because dealerships could still choose lenders based on which paid the highest flat fees.

CFPB Director Richard Cordray praised BMO Harris Bank’s move to a flat fee shortly after it was announced. Still, the bank has stopped short of linking the switch with the CFPB’s demands.

“We consider a variety of factors before making any changes to our services and products,” O’Herlihy told Automotive News in May. “The evolving regulatory environment would be one of those considerations.”

You can reach Jim Henry at

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