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Bank Eliminates Dealer Markup, Cites CFPB Guidance

April 24, 2014

Photo via Flickr. 
Photo via Flickr. 

CHICAGO — Dealer customers of BMO Harris Bank were issued a notice Monday that the finance source has eliminated dealer discretion in the setting of interest rates on retail installment sale contracts. The change, according to the notice, is in response to the guidelines issued by the Consumer Financial Protection Bureau (CFPB). 

“While no specific safe harbor has been identified by the CFPB, we have taken these proactive steps to follow current CFPB guidance while continuing to offer significant value to our dealer customers,” the notice, obtained by F&I and Showroom, read, in part.

In March 2013, the CFPB issued guidance claiming that potentially discriminatory markups in auto lending may result in tens of millions of dollars in consumer harm each year. The guidance has sparked much debate among dealer associations and lawmakers alike, who have questioned the CFPB’s methods and transparency related to determining the presence of discriminatory practices.

BMO Harris Bank took a survey of more than 3,000 of its dealer customers in February. According to the notice, it used those results to produce “a program that removes dealer discretion in pricing while continuing to compensate [dealers] … fairly and equitably.”

 “…after careful consideration of the needs of our customers and the evolving regulatory environment, BMO Harris Bank is taking the lead in changing its indirect auto lending practices,” said Vice President and Head of Media Relations Jim Kappel in a statement emailed to F&I and Showroom. “We believe the new guidelines create greater pricing consistency at the dealer level and demonstrate the bank’s deep commitment to fair lending practices. 

“We will continue to offer competitive rates and programs as our pricing model, which, combined with the high level of customer service we provide dealers, has helped to drive our growth in this segment.”

Under the new program, contracts must be delivered at the “buy rate” to be eligible for purchase by BMO Harris Bank. The bank will pay a flat fee of 3% of the amount financed — up to $2,000 — for contracts with maturities greater than 35 months.

The new policy went into effect on Thursday.  

Comments

  1. 1. David Ruggles [ April 26, 2014 @ 06:01AM ]

    It will be great to see how this impacts the bank. I suspect they will regret their move and will be on the outside looking in.

  2. 2. Concerned Citizen [ April 26, 2014 @ 08:41AM ]

    As a dealer that has BMO as one of it's lenders...we will not be using BMO any longer. Our finance departments work very hard at finding our customers the best loan for their situation. I think this lender situation with the various government agencies has gotten out of control. Not everyone is the same risk to a lender. A 400 credit score with 2 repos, $50k and growing in never to be repaid student loan debt and $800-4500/month in SSI income is a higher risk than an 800 who's been responsible and has paid their bills religiously. It appears they will soon be paying the same interest rate on vehicles inj the very near future.

  3. 3. STEVEJ [ April 26, 2014 @ 10:19AM ]

    I disagree with concerned citizen. However,I think it will mean that evreyone of their customers will be paying a higher rate. There is no way they can pay 3% of the amt financed based on their previous rate sheet. I am still trying to figure out how a bank in an indirect lending enviornment can determine the ethnic race of someone that they have never met.

  4. 4. Business Manager [ April 26, 2014 @ 11:56AM ]

    Concerned Citizen...They are not saying that everyone pays the same rate. Maybe everyone with the same credit score will Buyers will get a rate based on their credit score. They just don't want dealers to mark up the rate on people with low scores a lot higher than they would on people with great scores. There has been a tendency among finance managers to mark up the rate to the max on someone who has a low score since it's hard for them to buy a car elsewhere. One way to do this, is by forcing dealers to give the customer the buy rate and the dealer will get a flat 3%. I have many banks that now pay 1% flat at buyrate or 3% flat if we mark it up only 1 point. The industry is changing. Weak finance managers won't make it. If they can't sell product and only live off the rate, it won't work.

  5. 5. Mike [ April 28, 2014 @ 05:47AM ]

    I find it ironic that the dealers of the buy here pay here advertise no interest but charge the customer with the low credit scores two to three times of what the vehicle is worth are the ones that are really taking advantage of the less fortunate customers. These are the customers that are either in that subprime or buy here pay here catagory. The customer that is getting taken advantage of is the one not asking the questions they should be asking or the one that does their homework after they buy.

  6. 6. Marcy - Business Manager [ April 28, 2014 @ 10:38AM ]

    We will see most lenders going to a "flat-fee" program. Business Managers that live by the rate, will die by the rate. There are other lenders that specialize in sub-prime loans, BMO has never been a player in that market

  7. 7. Joe [ April 29, 2014 @ 05:09AM ]

    We do both buy here pay here and prime deals. Often times a sale to a prime customer yields more than the profit on a subprime deal due to the fact more product can be sold on a prime customer deal, combined with much bigger balances are approved for interest reserve....All with no risk to the dealer. The whole concept of the government dictating a profit margin in any sale is contrary to a free market system. If a customer is given a higher rate, it's usually because he has earned a higher rate by defaulting on a loan which consequently raises the rate across the boards on all borrowers, including the ones who live up to their obligations.

  8. 8. howell clark [ May 05, 2014 @ 09:15AM ]

    well i see the nice anti profit control freak military industrial complex preachers who have worked there way into safe haven government jobs have struck the fear of the sickle into another bank. my banks went flat rate two years ago. as bad as losing profit is on a workable deal it is not near as deadly as the no deal at all from the fairness in lending guide lines that force a bank to give the same rates to a less deserving customer if ,and heres the problem, they lend them at all ,which in most cases they are saying no to the new marginal folks rather than risk them for not enough return. i survived many years cash or local bank loans for my customers and lately have had to go the third party subprime route to maintain sales. sure hope its awhile before the sickle of these hard core social dogooders mows down these folks also. franchise dealears are simply going to have to get back to front end gross.

  9. 9. Robert Combs [ May 07, 2014 @ 01:07PM ]

    I don't know about you, but all of my sub 650 credit scores end up in some sort of tiered interest rate decided by that score. When the banks agree to finance a 585 score with 20 medical collections, a judgment or two, late payments scattered through-out, does that mean the lender must pay more for the money they lend the riskier customers or do they still pay the same .75% when buying their money from the FED? The only limit they are imposing on interest rates is what we, the people who direct customers to their bank, do the selling and the closing, are able to make in profit. When I get a letter from a lender reading me the riot act about how many points I can mark-up or how much I can sell my products for I want to ask them how they justify approving a deal where they will make 10 to 15 points above what they pay for the money, but limit what we can charge to earn our living----------- NMAC just today sent me an email limiting me to 1.75% mark-up on new cars and 2pts on used. Last year they went in and cut the MSRP on most of their cars---they did not adjust the cost of those cars, simply cut the available profit --- A salesman can sell an Altima S for MSRP, then after the dealer pack and the PDI charge the salesman can make a whopping $200 a car..........the rich keep getting richer and we keep paying their bills.

  10. 10. ed lowitzki [ May 13, 2014 @ 12:14PM ]

    I REALLY DONT BELIEVE ALL LENDERS WILL GO TOO FLATS!!Those that do will be last lenders too send a deal too.
    The bmo's of the world never bought a full spectrum like a wells or capone.You can get the same rates from them with spread and product all day long with just them on all credit scores

  11. 11. Mike [ June 09, 2014 @ 02:20PM ]

    I honestly believe this is being read into much farther than it has to be. All this is, is the leader of our country finding a way to keep the popular vote in his favor, and in his PARTY's favor. The US government is strong-arming banks. It is a complete joke in every sense of the word. Peolple who have poor credit, get poor interest rates. Has anyone ever sat down and spoken to one of their bank reps, or looked into how they index what race the customers are? BY LAST NAME. They say that Smith, Jones, Lopez, etc, are more likely to be the last name of some minority group. The numbers are completely padded and untrue. Ally got hit for $98 million dollars because their "minority" customer was paying on average $600 more in interest over the ENTIRE loan term. Once again, "minority" refers to Ally's customers that the CFPB that have African-American or Hispanic LOOKING last name! Wake up folks.

  12. 12. Mike [ June 09, 2014 @ 02:21PM ]

    I honestly believe this is being read into much farther than it has to be. All this is, is the leader of our country finding a way to keep the popular vote in his favor, and in his PARTY's favor. The US government is strong-arming banks. It is a complete joke in every sense of the word. Peolple who have poor credit, get poor interest rates. Has anyone ever sat down and spoken to one of their bank reps, or looked into how they index what race the customers are? BY LAST NAME. They say that Smith, Jones, Lopez, etc, are more likely to be the last name of some minority group. The numbers are completely padded and untrue. Ally got hit for $98 million dollars because their "minority" customer was paying on average $600 more in interest over the ENTIRE loan term. Once again, "minority" refers to Ally's customers that the CFPB that have African-American or Hispanic LOOKING last name! Wake up folks.

 

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