HARRISBURG, Penn.-The Consumer Financial Protection Bureau may be zeroing in on buy rate financing, a move that could help level the indirect auto lending playing field between banks and credit unions.

The new consumer agency made it clear last month it is looking into the practice of dealers marking up the interest rate on loans-known as buy rate, dealer reserve and dealer mark-up. The CFPB warned four large banks of potential lawsuits for alleged discriminatory lending under the Equal Credit Opportunity Act, according to published reports. American Banker, a sister publication of CU Journal, reported last summer that the consumer agency was investigating whether the rate mark-ups are being imposed by auto dealers in a discriminatory way.

Buy rate financing is used extensively by banks but very little by credit unions, analysts shared. With buy rate, dealers are generally allowed to increase the amount of the FI's rate from two to 2.5 percentage points, keeping much of the revenue from the mark-up. It's a practice sources claim often takes advantage of car buyers with poor financial balance sheets as well as minorities.

According to sources, most credit unions do not use buy rate. Instead, they typically give dealers a fee based on a percentage of the auto loan.

Credit unions lenders over the past year have told Credit Union Journal that banks have increased their mark-up percentages they allow dealers, and more banks have adopted the mark-up practice overall, as the auto lending market has heated up post-recession. Sources, too, surmised that more credit unions are allowing dealer mark-up due to the heavy competition.

"It is so competitive out there," said Greg Smith, CEO of the $4-billion Pennsylvania State Employees CU, who said his organization does not allow dealers to mark up the credit union's rate. "If I am a dealer and I am getting a flat rate from the credit union-maybe a $300 fee on the loan-and I can make $600 with a bank by marking up the rate, what lender do you think I turn to when a car buyer walks in?"


A Competitive Disadvantage

Frank Rinaudo, EVP for GrooveCar and CU Xpress Lease, Hauppauge, N.Y., said GrooveCar CUs do not allow dealers to mark up the rate. "Certainly it's a competitive disadvantage. We recently sent a survey to about 75 dealerships and the number-one reason for deciding where to send the paper was the ability to mark up the rate."

Rinaudo said savvy, informed consumers tend to avoid the mark-up in the F&I office, because they understand where the rate should generally come in, as opposed to buyers who have not done their homework and often have weak credit. "You've seen banks over the years being sued and paying fines for predatory lending."

Smith is concerned for ill-informed consumers who have no idea what is happening to them in the F and I department, and all the person sees is the monthly payment and the shiny new car. "I am all for what the CFPB appears to be doing here. I am dead set against the practice of dealer mark-up. It violates basic credit union principles to allow a dealer to gouge a member by marking up the rate."

Tony Boutelle, president and CEO of CU Direct, Ontario, Calif., sees the CFPB's attention here, and potential actions, as positive for credit unions. CU Direct CUs are not restricted from employing buy rate, but only a small percentage do so, Boutelle stated.

"Overall I see any moves by the CFPB as helping to level the playing field with banks and credit unions for indirect lending," said the CU Direct chief. He added that due to the fact all but four credit unions have assets below $10 billion and the small number of CUs using buy rate, he does not feel credit unions will become a CFPB target.

Boutelle noted that it is very difficult to predict where the CFPB attention on buy rate is heading, pointing out that the bureau is new to rulemaking and that there has been talk for many years in the financial and automotive industries of Washington getting rid of buy rate.

"It's a big competitive edge for banks," stated Boutelle, saying he was aware of a large captive finance company that decided to stop doing buy rate in favor of a flat fee and got "killed" by competitors. He also pointed out that some states have addressed the matter, passing laws to eliminate predatory lending from the buy rate practice. Boutelle said California law requires dealers to disclose to car buyers when the rate is negotiable, as is the case with buy rate.


'Deserve' What They Get

Sources stated that if buy rate were eliminated nationally that a standard flat fee for dealerships could become the norm, expressing concern that figure could be high. Several sources told Credit Union Journal that CU dealer fees have been climbing to compete with banks, with many moving up to 1.5% to 2%.

No matter what the result from any CFPB actions regarding dealer mark-up, sources emphasized that any credit unions using buy rate had better dedicate time and resources to monitor their dealers for discriminatory lending practices.

PSECU's Smith was firm in his stance against buy rate, saying, "Credit unions that engage in the practice deserve whatever the CFPB does to them.




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