Last month, BMO Harris Bank made the switch from dealer reserve to flat fees for compensating dealerships for arranging auto loans. The bank now pays a flat fee of 3 percent of the amount financed up to a maximum fee of $2,000 for contracts of 36 months or longer. BMO Harris is the first large auto lender (17th largest by portfolio size) to make this move.
Last year, the Consumer Finance Protection Bureau (CFPB) released a bulletin that suggested policies which allow dealers to exercise discretion over interest rates and provide direct financial incentives for charging higher prices may lead to fair lending violations under the Equal Credit Opportunity Act.
The CFPB claims that it is not pushing the industry to flat fees. On the other hand, CFPB Director Richard Cordray said in a written statement, “It is encouraging to see BMO Harris taking this proactive step to protect consumers from discrimination.”
What does that mean? Switching to flat fees does not eliminate dealer discretion, because flat fees can differ and dealers would still have to choose finance sources. How do you think your finance managers will choose their lending source? Would it possibly be based on who flat fee is the highest and, therefore, where they will make the most money?
NADA has released an new article, "The Fallacy of Flats" (which can also be found in this bulletin), that addresses an important compliance issue facing dealers in connection with dealer-assisted financing. In this article, NADA’s Paul Metrey cautions dealers that lender programs that pay dealers a flat fee do NOT eliminate the dealer’s risk of violating fair credit laws.
It is therefore important that dealers develop an effective means of managing the discretion they exercise in pricing credit, regardless of the way lenders pay them. To that end, the NADA Fair Credit Compliance Policy & Program provides a dealer with an optional method of managing its discretion (and in a manner that allows consumers to benefit from competition) when working with lenders who pay dealers using a dealer reserve or dealer participation approach.
I strongly encourage you to read through this policy to see if it might help you mitigate these risks in your store.
FTC Staffers Opine on Federal Blog
Three staffers from the Federal Trade Commission posted a blog on the agency’s website expressing their own opinions—not the opinion of the FTC or any individual commissioner—about how new cars should be retailed in the U.S.
The FTC staff bloggers, however, failed to acknowledge how the franchised dealer network actually benefits car buyers through price competition and safety, and provides enormous economic benefits to local communities.
During a flurry of media inquiries from Reuters, Automotive News, USA Today to CNN and others, NADA responded as follows:
“For consumers buying a new car today, the fierce competition between local dealers in a given market drives down prices both in and across brands – while if a factory owned all of its stores it could set prices and buyers would lose virtually all bargaining power,” said Jonathan Collegio, NADA vice president of public affairs. “And buying a car isn’t like buying a pair of shoes online. Cars require licensing to operate, insurance and financing to take home, and contain hazardous materials, so states are fully within their rights to protect consumers by standardizing the way cars are sold.”
So it is important that we have the bureaucrats' opinion?
The Dealer Franchise System Works Best for Manufacturers
A new NADA study highlights why the dealer franchise system is the most efficient and effective way for auto manufacturers to distribute and sell automobiles nationwide.
According to the study, “Franchised dealers invest millions of dollars of private capital in their retail outlets to provide top sales and service experiences, allowing auto manufacturers to concentrate their capital in their core areas of designing, building and marketing vehicles”.
Key findings of the NADA study, “Auto Retailing: Why the Franchise System Works Best,” include:
- The average dealership today requires an investment of $11.3 million, including physical facilities, land, inventory and working capital.
- Nationwide, dealers have invested nearly $200 billion in dealership facilities.
- Annual operating costs totaled $81.5 billion in 2013, an average of $4.6 million per dealership. These costs include personnel, utilities, advertising and regulatory compliance.
- The vast majority—95.6 percent—of the 17,663 individual franchised retail automotive outlets are locally and privately owned. They generate billions in state and local taxes annually and provide significant employment opportunities that help build goodwill in the community.
- Manufacturers benefit from the high return on capital invested in manufacturing vehicles, as opposed to the low margin of retailing them.
- Dealers bear the cost and risks of these investments—at virtually no cost to the manufacturers—and provide a vast distribution channel that benefits the consumer.
The study is part of a major new “Get The Facts” initiative from NADA to promote the benefits of America’s franchised new-car dealership network. The initiative includes a Web site and variety of multimedia resources available at http://www.nada.org/GetTheFacts.
The centerpiece of the project is a two and a half minute animated video detailing the benefits of the dealer franchise system, viewable here. Other resources include a 30-second video, a fact sheet on the consumer benefits of dealers, a longer informative FAQ, a document explaining the reasons for state franchise laws, an infographic and other materials.
Click here for the study.
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