BB&T Dealer Financial Services is the first Top 20 auto lender so far to switch to flat fees from dealer markup, apparently to head off potential problems with regulators over dealer discretion in setting consumer interest rates.
“We’ve been testing and evaluating flat-fee products for the last two years so we believe this is a good long-term business decision for both consumers and our dealer partners,” BB&T spokesman Brian Davis told Auto Finance News today.
The new BB&T flat fee, which takes effect July 1, is 3% of the amount financed, up to a maximum fee of $2,500, a dealership source said. BB&T, based in Winston-Salem, N.C., wouldn’t confirm the amount.
BB&T makes mostly prime-risk auto loans in Mid-Atlantic and Southeast states, plus Texas. The new flat fee does not apply to Regional Acceptance Corp., a BB&T unit which offers subprime auto loans nationwide.
The bank didn’t attribute the move to pressure from regulators, but in a written statement the bank cited “fair and equal treatment of all consumers,” and said it was launching a “nondiscretionary dealer compensation program.”
The latter is a buzzword of the Consumer Financial Protection Bureau, which has been trying to get auto lenders to stop compensating dealerships using dealer reserve, also called dealer markup, since March 2013. That’s when the CFPB issued industry guidance that equated allowing dealer discretion in setting consumer interest rates with allowing discrimination against legally protected classes of borrowers.
The CFPB recommends flat fees or other “nondiscretionary dealer compensation programs,” to take away dealer discretion while still compensating dealers for helping to line up loans. In the biggest test case so far, the CFPB and the U.S. Department of Justice socked Ally Financial with a $98 million consent order in December 2013.
However, Ally and all its major competitors have stuck with dealer markup, supplemented with much stricter monitoring of loans originated at dealerships, to try and eliminate pricing differences among customers with similar credit histories.
BB&T’s move makes it just the second sizable auto lender to adopt flat fees, said Ken Rojc, managing partner in charge of the auto finance group for Chicago law firm Nisen & Elliott. “Now we have two auto finance lenders who have switched,” he said. The other is BMO Harris Bank in Chicago, which switched to flat fees in April 2014.
Critics of the CFPB downplayed the BB&T change. “One company’s change won’t move the market,” said Karen Klugh, a spokeswoman for the American Financial Services Association, a lender group. “Consumers benefit greatly from the existing model, which is the best reason the market hasn’t moved away from the existing model to flats,” she said.
Jared Allen, a spokesman for the National Automobile Dealers Association said NADA wouldn’t comment on a specific company, but the association was “concerned” in general, about “any governmental pressure or requirement that a particular compensation model be adopted.”
The dealer association recommends that dealers follow a policy of setting a fixed ceiling on dealer reserve, and document specific “business reasons” for discounts, such as matching a competing offer.
According to the 2015 Big Wheels Auto Finance Data report, BB&T Dealer Financial Services was No. 19 in U.S. auto outstandings in 2014, with $12.8 billion in outstanding auto loans, an increase of 11.3% from 2013. BB&T was No. 20 in originations in 2014 at $6.9 billion, up 13.8%.
BMO Harris was No. 27, with about $6.9 billion in outstandings in 2014, up 5.8%. Originations were $3.4 billion, down 7.9%, according to Big Wheels data.