NEW ORLEANS -- The Consumer Financial Protection Bureau wants Ally Financial and other auto lenders to switch from dealer reserve to flat fees or some other new compensation plan for dealers.
But Ally will stick with dealer reserve.
"We are not going to be the Trojan horse for driving industry change," Ally CEO Michael Carpenter told Automotive News at the National Automobile Dealers Association convention here.
Dealer reserve is at the heart of allegations of discriminatory auto lending that led to the $98 million consent order Ally signed Dec. 20 with the CFPB and the U.S. Department of Justice.
"We are not going to go to flats," Carpenter said. "That is obviously not what the CFPB wanted to hear. They thought we were going to cave" and set an example for other auto lenders that would reverberate through the industry.
Chicago lawyer Ken Rojc, a specialist in auto finance law, said: "This sends a huge signal to the industry."
Ally was the largest auto lender in the United States in 2011 and 2012. Its share slipped in 2013, but Ally remains among the top five, according to Experian Automotive.
Through a spokeswoman, the CFPB declined to comment for this report.
Carpenter acknowledged that profits are at stake: Dealers would simply take their business elsewhere if Ally dropped dealer reserve and other lenders didn't. But he insists that Ally's stand is partly the result of what Carpenter called "nonnegotiable principle."
In fact, Ally was standing its ground even as it negotiated separately with the Federal Reserve for a change in its legal status that was critical for continuing its insurance and online auction operations.
Dealer reserve, also known as dealer participation or dealer markup, is the added interest lenders allow a dealership to tack onto an auto loan as compensation for acting as a middleman. The amount of that additional interest, generally up to 2 percentage points, is set at the dealer's discretion.
The CFPB maintains that dealer discretion in setting dealer reserve results, whether intentionally or not, in higher interest rates -- a so-called disparate impact -- for legally protected classes of borrowers such as minorities or women.
The CFPB analyzed about 800,000 contracts, excluding ones that included automakers' incentives, which Ally had purchased from dealerships between April 2011 and March 2012. The study, which was the basis for the consent order, found that African-American borrowers paid an average of 0.29 percentage point, or about $300 over the life of the loan, more than similarly situated non-Hispanic whites.
Hispanic borrowers paid an average of 0.2 percentage point more, or about $200. Asian or Pacific Islander borrowers paid an additional 0.22 point, which also worked out to about $200, the consent order said.
Those price differences are statistically significant, the CFPB says. According to its analysis, the differences are not related to creditworthiness or risk. The bureau maintains that any creditworthiness concerns are priced into the loan by the lender before the dealership adds the dealer reserve.
Under the consent order, Ally agreed to pay $80 million in restitution and another $18 million in penalties for what the CFPB said was past discriminatory lending. Who is eligible for restitution and in what amount remain to be determined. In January, Ally said it will book a $98 million pretax charge to fourth-quarter earnings due to the consent order, but still expects net profits of $90 million to $110 million.
To eliminate discrimination, the CFPB wants lenders to switch to what it calls nondiscretionary compensation for dealers, such as a flat fee or a fixed percent of the amount financed, whereby dealerships in theory wouldn't have any discretion over their own compensation.