'Flat-rate model,' yes. Flat fees, maybe not.

Jim Henry is a special correspondent for Automotive News.

Well-traveled F&I vendor exec John Stephens predicts that in 2015 more lenders would probably adopt a “flat-rate model” to pay dealerships for arranging auto loans.

That’s not the same as saying more lenders would adopt a small flat fee, such as $50 per contract, he stressed.

But that $50 worse-case scenario is a big part of what makes dealers so angry at the Consumer Financial Protection Bureau, which has urged lenders since 2013 to drop their traditional dealership compensation method -- dealer reserve -- and pay dealerships fixed amounts instead. Dealers fear those fixed amounts would be less profitable.

The CFPB’s central argument is that dealer reserve -- an amount of interest that dealerships add to customer auto loans, usually capped at 2 percentage points -- results in higher interest rates for minorities and other protected groups because the dealerships set their own rate of reserve, customer by customer.

The bureau wants lenders to end dealer reserve and switch to a flat fee or a fixed percent of the amount financed or something else, so long as it eliminates “dealer discretion” in setting customer interest rates. The CFPB has said that lower ceilings on dealer reserve would also reduce the likelihood of discrimination.

Stephens, who is senior vice president of dealer services at EFG Cos., a major F&I administrator, said he’s confident the market eventually will dictate a solution that will satisfy regulators, dealers and lenders. But, he repeated, it’s not going to be a token flat fee.

You can reach Jim Henry at autonews@crain.com

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