A 3 percentage point cap on dealer finance reserves has become an industry standard in the wake of discrimination lawsuits filed by minority consumers alleging that they were gouged by dealers on car loans.
By limiting the finance reserve - the difference in the interest rate that the lender quotes to the dealer and the rate that the dealer quotes to the customer - lenders restrict the dealer's profit margin for arranging the loan but also reduce a dealer's opportunity to exploit some customers.
Hyundai Motor Finance Co., Mazda American Credit Co. and BMW Financial Services introduced a 3 percentage point cap on dealer reserves this year. VW Credit Inc. will initiate a 3 percentage point cap on standard rates and a 1 percentage point cap on promotional rates in July. And Mitsubishi Motors Credit of America, which has a 4 percentage point cap on dealer reserves, is considering lowering its cap to 3 points.
Ford Motor Credit Co., General Motors Acceptance Corp. and Toyota Financial Services introduced 3 percentage point caps last year. DaimlerChrysler Services AG and Honda Financial Services refused to comment on caps, but dealers say both limit reserves to 3 percentage points.
Subaru Financial and Volvo Finance North America Inc. have had 3 percentage point caps for several years.
"The vast majority of banks in the auto finance business have had caps," says Nick Stanutz, executive vice president of consumer credit administration for Huntington Bancshares Inc. in Columbus, Ohio, and chairman of the Consumer Bankers Association's auto finance committee. "A 3 percent cap is universal, and many banks reduce the cap to 2 percent for terms greater than five years."
The Consumer Bankers Association 2003 Auto Finance Study shows that 88 percent of banks cap dealer reserves.