U.S. Bank ‘Narrows Gap’ in Dealer Comp

It’s been three months since the CFPB released its guidance on dealer compensation, and U.S. Bank, for one, has limited dealer discretion when it comes to compensation.

In what may be the bank’s first public mention of the change, U.S. Bank Chief Credit Officer and EVP P.W. Parker revealed specifics during Morgan Stanley’s U.S. Financials Conference last week. Here’s a transcript of Parker’s comments, as documented on SeekingAlpha.com:

So CFPB has targeted what’s called the dealer reserve. And so that’s a ― it’s a significant source of income to dealers when we quote ― when a bank will quote a rate and the dealer can quote a different rate to the end customer and they’ll make ― the dealer will keep the difference.

CFPB’s concern is one of fair lending. And they’ve come out and said ― since they can’t directly regulate what goes on at the dealership, they’re coming through the banks and saying, ‘Banks, we’re going to effectively hold you accountable.’ And so what we did in response, and a couple other banks have done similar things, is we’ve narrowed the possible gap in the discretion that the dealer has. So we compressed their ability. They still have some room, but it’s less than it used to be.

I think the big question is this would all be eliminated if there were just sort of a flat fee arrangement or something like that rather than the spread arrangement. But that’s not something that U.S. Bank can control. I mean, the industry would have to gradually migrate to that. But we’re ― we were ― when the CFPB came out with its guidance, we were quick to react to try to limit that fair lending issue.

When asked by Morgan Stanley analyst Betsy Graseck whether the bank would support switching to a flat fee for dealer compensation, Parker responded:

Well, I don’t want to say I’d be supportive. It’s an important ― today’s structure is a very important source of revenue for the dealers. So I really think it’s not just for us to make that determination.

And in response to Graseck’s question about whether business activity with dealers has changed as a result of the shift, Parker said:

No, no. They’ve been supportive, and we’ve seen strong volumes this quarter.