ONTARIO, Calif.—The CFPB’s crackdown on the practice of dealer mark-up may lead to higher flat fees FIs pay to car stores, one expert suggests.
The CFPB has been taking action against lenders that participate in the practice of dealer mark-up. Dealer mark-up, also referred to as buy-rate financing, is when the lender provides the dealer with its rates, then allows the F&I department to mark up the rate at their discretion.
As previous reports have indicated, the CFPB has been coming down on dealers for the practice and has turned its attention now to include big auto lenders. The CFPB cites the practice as being unfair, deceptive and sometimes discriminatory.
The CFPB recently took action against Fifth Third Bank, and has also settled with American Honda Finance, Toyota Motor Credit Corp., Nissan Motor Acceptance Corp. and several large banks, including Ally Financial.
Level Playing Field
Auto industry experts say this will help level the indirect playing field for CUs, which typically do not offer buy-rate financing and instead pay dealers a flat fee based on the loan amount. Paul Kirkbride, SVP of credit union solutions at CU Direct, agrees that the CFPB’s actions should help CUs book more loans. But he also sees the CFPB’s moves putting more pressure on lenders to raise dealer flat fees.
A flat fee is based on the loan amount, typically around 1%, and is the dealer incentive used the most by credit unions.
“Credit unions do lose some business to lenders that offer buy-rate financing, since the majority of credit unions do not participate in this,” said Kirkbride. “As buy-rate diminishes, credit unions should pick up some market share. But it will take some time to see how all this shakes out. My guess is that at the end of the day, dealers will be compensated the same, it will just will be via a structure that does not throw up regulatory red flags, such as higher flat fees.”
Kirkbride said CU Direct has been watching for increases in dealer flat fees as the CFPB focuses on dealer mark-up.
Paul Kirkbride, CU Direct
“We have not seen significant increases in flat fees, but we have seen small increases,” said Kirkbride.
Overall, Kirkbride sees credit union auto lending remaining strong in 2016.
“I think it could even be a better year than 2015,” he said. “We have a stable automobile market, credit union auto loan technology is getting better every day, and CUs have a great brand and reputation. I think credit unions will increase market share next year.”
Rising Rates
With the Federal Reserve expected to raise interest rates at some point, Kirkbride does not believe it will pull car buyers out of the market, noting that small, incremental rate increases won’t impact borrowing decisions.
“That will have an immaterial impact on auto financing, as car loans are really payment driven,” said Kirkbride. “And 25 to 50 basis points has a very minimal impact on monthly payments.”
Kirkbride does think that rising rates, however, will reduce the appeal of CU auto loan recapture programs for a period of time.
“If rates go up a half percent, that recapture offer won’t look as attractive,” he said.
Financial institutions have been steadily extending auto loan terms, some beyond 90 months. Kirkbride, however, does not see CUs extending terms out much farther than where they are today to help members keep payments down as rates rise.
Extended Terms
“I think we have just about reached the limit—probably seeing the longest terms in the marketplace,” said Kirkbride. “And from a risk perspective, I don’t see credit unions going out much longer.”
What CUs can do more of, Kirkbride said, is to continue to automate the lending process.
“Credit unions are great at building relationships, both with dealers and their members. Relationship building and technology are related. So where they are able, credit unions should optimize back-end lending efficiencies,” said Kirbride, who favors automated loan decisioning. “Because if you get dealers their decisions and money faster, you build stronger relationships, and you get a happier borrower.”