Feds Put More Pressure on Auto Financing

Actions against the dealer-reserve system may eventually extend to other finance and insurance products.

Gil Van Over

March 25, 2013

3 Min Read
Feds Put More Pressure on Auto Financing


Occasionally, words or terms enter our lexicon and then disappear. I can’t recall the last time I heard anyone complaining about an achy breaky heart or screaming “dy-no-mite!”

We can only hope for the quick disappearance of “disparate impact,” the latest term we’ve become painfully aware of that affects the auto-financing industry.

But what has happened recently could just be the beginning of the Federales use of disparate impact as a threat to dealership business models.

As a primer, the Equal Credit Opportunity Act makes it illegal for a creditor to discriminate in any credit transaction against any applicant because of race; color; religion; national origin; gender; marital status; age and more.

Using the act as the basis of potential enforcement, the Consumer Financial Protection Bureau and Department of Justice are probing potential patterns of discrimination, not individual cases. Disparate impact involves looking at the results of processes, not necessarily intent to discriminate.

Disparate impact is an industry buzzword because of the potential impact it could have on our business. In February, the CFPB reportedly notified four banks it may sue them over vehicle loans and auto-dealer interest rate mark-ups that appear discriminatory.

I’ve been able to identify three of the banks. One already has said it will periodically review dealer portfolios, addressing indications of potential disparate impact.

Will the Federales Stop at Dealer Reserve?

So while everyone is walking around with an achy breaky heart trying to figure out how to best mitigate disparate impact’s effect on dealer reserve, I envision Federales running around their offices shouting “dy-no-mite” because they figured out dealers make a fair profit from more than interest rates.

I don’t believe the Federales will stop with interest rate mark-ups. Here are a few other potential areas.

F&I Products

Virtually every dealership finance and insurance office sells vehicle service agreements and gap insurance. Some states regulate prices, but most leave it to the dealer or lender to cap the price of these products.

Similar to dealer reserve, even if the lender caps the retail price, dealers currently have the flexibility to negotiate the price with the consumer. This business model works, but could come under attack by the Federales using the disparate impact theory.

If a class of consumers pays a higher average mark-up on a service agreement, the Federales could allege discrimination against that class, even if it is unintentional. The same could apply to all F&I products. I can foresee the Federales forcing one-pricing rules in the F&I office.

Spot Delivery

Spot deliveries, in which a customer takes possession of a car pending final loan approval, have been accepted for years. But in the minds of some litigators and regulators, spot deliveries define the dealer as a creditor subject to many lending regulations.

Some dealership F&I people have abused spot deliveries. As much as we love the car business, we must admit there are some bad players. No different than any profession.

The Federal Trade Commission has sent several dealers inquiries seeking empirical data on spot deliveries going back years. The focus of these requests appears to be unwinds and so-called yo-yo transactions.

The day may come when the FTC forces us to change our business model by restricting the ability to spot-deliver vehicles. Some states already do restrict that.

I hope I’m wrong, but I started predicting the eventual elimination of dealer reserve eight years ago. We appear closer to that with each passing day.

Continued good luck and good selling.

Gil Van Over is the President of gvo3 & Associates, a nationally recognized compliance consulting firm that specializes in F&I, Sales, Safeguards and Red Flags compliance. Gvo3’s website is www.gvo3.com.

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