The City of New York is campaigning to remove dealer reserve from used-vehicle financing. And it’s enlisting lenders’ help to do it.
Last month, the New York City Department of Consumer Affairs asked lenders to join a marketing and consumer education program aimed at urging used-car buyers to procure their auto loans directly from a lender instead of opting for dealership-arranged financing, including when buying a used car from a new-car dealer.
Lenders who join the program would agree to certain conditions, including an agreement that “there must be no compensation for the secondhand auto dealer for referrals” to the lender. Lenders would also agree to “affordability features,” including limits on customers’ debt-to-income ratio and payment-to-income ratio. In return, the department will market the program to consumers as well as promote it through city agencies and community organizations, which could help “partnering financial institutions broaden their customer base.”
‘Alternative to indirect’ loans
The department described the direct-to-consumer loan program to lenders in a Request for Expressions of Interest released May 19. The city asked lenders to respond starting April 17.
In the request, the department said it had initiated the program “in an effort to provide an alternative to indirect auto loans, and to protect consumers from improper or abusive dealer financing practices in the used car marketplace,” including taking a dealer reserve and adding on products unwanted by car buyers.
“Many consumers who obtain these loans believe the dealer has negotiated the best rate for them and are unaware they are actually paying to increase the dealer’s profit margin. … Dealer markups also provide dealers with the incentive to sell consumers unwanted add-ons to increase the amount of financing on a loan and the related markup,” the request said.
Dealer reserve, often called dealer markup, is a percentage of interest that most dealerships add to a lender’s buy rate on a car customer’s auto loan as compensation for arranging the loan. The reserve is usually capped at 2 or 3 percentage points. The lender pays the reserve to the dealership in a lump sum.
Mix includes franchisees
New York City has an unusual setup in which the city licenses used car retailers. That includes franchised, new-vehicle dealerships that sell used cars as well as independent used-car dealerships and buy-here, pay-here stores.
All told the city licenses 869 used-car retailers. Last year the Department of Consumer Affairs received 283 complaints about used-car dealerships, “ranging from misrepresentation to damaged goods to breach of contract.” The department secured almost $900,000 in restitution for consumers in 2014, Commissioner Julie Menin said in a statement.
Consumers ‘like choice’
Mark Schienberg, president of the Greater New York Automobile Dealers Association, said last week the city’s initiative could serve to limit customer choice and access to lower rates.
“Consumers overwhelmingly like choice. They like convenience,” he said. “Our concern is that customers wouldn’t get the convenience and also the benefits of lower rates from the fact that the dealership sends their application to multiple lenders and the lenders compete with each other.”
