Dealerships should adopt a standard amount for dealer reserve as part of a detailed fair lending program to protect themselves from potential lawsuits driven by federal regulators' crack down on auto lenders, experts say.
"The more standardization you can put in place, the better you are able to protect yourself. Doing nothing is no longer the appropriate course of action," attorney Jeff Levine said today during a webinar held as part of Automotive News F&I Week. Levine, based in New York, is a partner at Hudson Cook law firm in Hanover, Md.
Dealer reserve is the amount dealerships add to an auto lender's wholesale interest rate to reach the retail rate the customer pays. Dealerships take the reserve as compensation for having arranged the loan.
The Consumer Financial Protection Bureau, a federal agency, said in March that lenders' practice of allowing dealerships to set the customer's final interest rate creates a risk of discrimination against legally protected consumers, especially minorities.
The bureau says that franchised dealerships that negotiate loans for customers, known as indirect loans, are exempt from its jurisdiction. However, the experts said, that's no protection because the bureau is holding lenders liable for dealership policies.
The bureau is also working with regulators that have direct jurisdiction over dealerships, including state attorneys general and the Federal Trade Commission, experts said.
The experts -- Levine; L. Jean Noonan, another Hudson Cook partner; and Dave Robertson, executive director of the Association of Finance & Insurance Professionals -- said today that dealerships should create their own programs to monitor fair lending practices, similar in some ways to the programs auto lenders are creating to monitor dealerships in response to the bureau.
"We're not recommending that dealer reserve should go away," Noonan said. "But we do recommend that dealerships set a standard markup rate to all transactions, subject to exception guidelines."
For example, she said, a dealership might set a standard rate for dealer reserve of 150 basis points. Some large, publicly traded new-vehicle retailers already have capped dealer reserve as well as dealerships' markups on aftermarket products such as extended-service contracts.
Dealerships can probably defend making exceptions to their standard amount in certain cases, Robertson said. For example, a dealership could charge less than the standard rate if the dealership had a limited-time promotion, the experts said.
Noonan said in such a scenario, exceptions to the rule should truly be exceptions and not just a way to get around the standard.
She added: "If exceptions are few and well-documented, then you are in a good position to protect yourself."