For auto dealerships, there is something called the dealer reserve, which is a percentage a lender will let a dealership add to a loan’s interest rate. The dealer reserve, typically at or below two percentage points, is compensation the dealership receives for setting up the loan.
Some dealers in the Detroit area are feeling somewhat offended after being accused of discrimination with regard to their practice of arranging loans. One dealership owner even suggested that other dealers contact a business attorney before responding to the allegations, which were made by a number of major auto lenders.
In particular, dealerships across the country have been accused of discriminating against buyers based on their ethnicity, race, age and gender. Letters sent to dealers claim that their dealer reserve has been higher for borrowers in those groups.
Many who have received the letters believe they were sent because of pressure from the Consumer Financial Protection Bureau, which was created in 2010 but doesn’t have jurisdiction over auto dealerships. Still, American Honda Finance Corp. and Toyota Motor Credit Corp. have indicated that the bureau, along with the U.S. Department of Justice, have asked for information about how auto loans are priced.
Regulatory filings also show that the bureau and the Justice Department are looking into discriminatory auto lending.
Dealers say they have done nothing wrong, however, and that the methodology and guidelines used by the bureau to identify discrimination are flawed.
Nevertheless, lenders such as Chase Auto Finance have threatened to reduce or stop altogether the practice of allowing dealer reserves, which make up a significant amount of dealership profits.
As regulatory issues arise, Detroit-area auto dealers will undoubtedly want to cover their legal bases to protect profits now and in the future.
Source: Crain’s Detroit Business, “Lenders warn auto dealers about bias,” Jim Henry and Jamie LaReau, Oct. 2, 2013