Credit union ads highlight misperceptions of dealer reserve

A Florida credit union’s ad campaign beating up dealers and auto lenders for “rate markups” is hard to look at, but dealers and lenders should check it out to see what they’re up against in terms of public perception and in case the approach catches on in other states.

The Space Coast Credit Union ads treat dealer reserve -- the small amount of interest lenders allow dealerships to add to the buy rate to compensate dealerships for acting as a middleman -- like it’s a dirty secret.

To distinguish itself, the Melbourne, Fla.-based credit union takes pains to point out in an advertising and social medial campaign graphic that it “has never participated in rate markups.”

Where to start? There are kernels of uncomfortable truth in the credit union campaign, along with some glaring omissions, from the point of view of anybody who knows anything about indirect auto financing.

The campaign gets a lot of its ammunition from the Consumer Financial Protection Bureau’s consent order with Ally Financial in late 2013. Ally paid $98 million, including $80 million in restitution to minority buyers. According to the CFPB, those legally protected borrowers paid higher rates for dealer reserve.

The consent order is an uncomfortable truth. But the credit union campaign doesn’t mention the discrimination aspect. The credit union material makes it sound as if Ally paid simply because it engaged in “markups.” Nor does the ad campaign mention that Ally denied discriminating, even as it agreed to pay up.

The credit union material doesn’t attack dealerships directly for engaging in “markups,” but it does claim consumers pay additional billions of dollars for “dealer-financed cars.”

Dealer advocates would say the credit union campaign casually exaggerates how much dealerships earn in dealer reserve. The credit union claims the “average” markup is 2.5 percentage points, citing the Center for Responsible Lending in Durham, N.C., a longtime critic of dealers and lenders. In fact, dealer reserve is typically capped at 2 or 3 percentage points. That’s an upper limit, not an “average.”

That misperception of dealer reserve is a real problem for dealerships, and it doesn’t just come from a single credit union. In a U.S. Senate Banking Committee hearing in November 2013, Sen. Elizabeth Warren, D-Mass., made it sound as if dealerships kept dealer reserve a secret from consumers and even from lenders. Far from correcting her, CFPB Director Richard Cordray enthusiastically agreed, saying: “If the dealer gets a buy rate of 4 percent that I actually qualify for, they’re typically not telling me that. They’re simply quoting back some other rate -- 8 or 10 or 14 percent -- and not telling me that the buy rate that I qualified for based on my creditworthiness was 4 percent. That’s one of a number of concerns we have.”

If the regulators can’t get their facts straight, maybe dealers and lenders shouldn’t get too mad at the credit union.