Rate Markup, the CFPB, and Common Sense

Auto industry finance experts agree that the Consumer Financial Protection Bureau will eventually turn its focus to rate markup on dealer arranged finance contracts. Consumer advocates bring up anecdotes of what they refer to as “rate gouging” as proof regulation is needed. David Robertson, President of the Association of Finance and Insurance Professionals, points out, “There is no empirical evidence that consumers who use auto dealer arranged financing pay higher interest rates than other auto loan borrowers.” But Dodd Frank has already imposed similar legislation on the mortgage business capping rate markup and broker compensation.

The threat that the CFPB may take away the opportunity for dealers to make “rate spread” is an emotional issue, if only for the sake of principle. According to Terry O’Loughlin, director of compliance for Reynolds and Reynolds Co. (www.reyrey.com), “The CFPB would more effectively advance consumer interests if it identified serious problems to police. It is attempting to provide a solution to a problem which doesn’t exist. There is nothing preventing consumers from shopping rate. In fact, it has never been easier for them. Often, dealers are able to gain financing for consumers they couldn’t arrange for on their own.”

Despite the fact that auto industry is dug in against regulation of rate markup, there is another way of looking at the issue. Highly respected Finance and Insurance trainer, George Angus, training director for Team One Research and Training, provides perspective. According to George, and others who agree with him, myself included, making excessive rate mark-up is counterproductive, perhaps even “stupid.” In fact, George used that exact word to describe the consequences of excessive rate markup to an enthralled group at last summer’s F&I conference held in Las Vegas. It is dealer compensation plans for their F&I producers that are the problem.

Why is excessive rate markup “stupid?” Increasingly there are companies like Rate Genius, who contact borrowers with an offer to pay off their “unnecessarily high interest rate” auto loan and replace it with a more “market rate” contract, thereby reducing the consumer’s monthly payment. They represent the market at work. Rate Genius, and the others, have every right to do what they do. Depending on how long after the original bank contract has been signed by the consumer at the dealership, and the dealership’s underlying agreement with their lender, the dealership may or may not receive a charge back to their interest reserve. The lender certainly takes a hit. It is quite likely that the dealership experiences a chargeback on other products sold and added on to the contract being paid off by Rate Genius and the others, and replaced with their own products.

The real damage is done to the relationship between the consumer and the dealership. What are the chances the consumer will return to the dealer for another vehicle? What are the chances the consumer will speak well of the dealer who charged them the “excessive rate” to their friends and associates?

Paying the F&I department based on income PVR (Per Vehicle Retailed) encourages charging higher than market rates that can end up in premature borrow payoffs, chargebacks, and hard feelings on the part of the dealer’s customers. Angus suggests paying F&I producers based on finance penetration and a formula based on the number of products sold per deal.

Our industry needs to tend to this issue for reasons of common sense, before the CFPB gets involved.


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