The CFPB is forcing car dealers to change their pricing to avoid potential discrimination. The consequences are far-reaching.
Regulation Could Change How You Set Prices
The Consumer Finance Protection Bureau (CFPB) recently announced that it was proposing significant changes to the method used by car dealers to determine the interest rate that consumers pay on car loans. These changes are adamantly opposed by both car dealers and lending companies, but the CFPB isn’t backing down. What is of most concern for all small businesses—not just car dealerships—is the CFPB’s rationale for the change.
Jim Henry of Automotive News reports that the CFPB wants to eliminate what is known as “dealer reserve,” which is like a commission that the dealership earns for arranging a financing package between the car customer and a lending company. Once the financing company establishes an interest rate based on the buyer’s application, the dealer is allowed to increase that interest rate by up to 2 percentage points. For example, if the buyer qualifies for a 7 percent interest rate, the dealer in practice tells the buyer the interest rate will be 8 percent. The value of the additional 1 percent interest is then paid to the dealer in an upfront lump sum by the lender as compensation for arranging the deal. This represents an important source of profits for dealerships.
The CFPB wants to eliminate dealer reserve because according to CFPB Director Richard Cordray, it creates the potential for discrimination. Their position is that the risk exists that a car dealer will try to charge women and minorities a higher dealer reserve and in effect increase their cost to finance a vehicle. Their solution is to eliminate dealer reserve.
