BB&T Tower in Atlanta (Via Wikimedia Commons and seniorliving.org)
BB&T Dealer Financial Services informed its “valued dealer clients” this week that the lender is switching back to a traditional dealer compensation model — foregoing its flat-fee program, a company spokesman told Auto Finance News.
“While we had some successes with the flat-fee program announced in 2015, BB&T also experienced an overall reduction in volume,” Brian Davis, the bank’s director of corporate communications, told AFN in an email. “So to provide our dealer clients with more options and better flexibility, we will introduce a more traditional auto pricing program in mid-March.”
BB&T and BMO Harris Bank were the only two lenders to switch to a flat-fee dealer compensation model following a string of consent orders to other lenders in the space from the Consumer Financial Protection Bureau. The consent orders looked to reign in the disparate impact of discrimination abuses in the industry, in part, by capping how much dealers could increase the interest rate on — or “mark up” — a deal. Dealers, in turn, can make a profit off the difference between how much a loan is marked up and the lower rate the consumer was actually approved for by the lender.
In response, BB&T instituted a policy in which all dealers were given the same rate to discourage markup and eliminate the risk of discriminatory disparate impact against protected minorities.
“BB&T remains firmly committed to the auto finance industry and to the fair and equal treatment of all consumers,” Davis noted.
The shift in the bank’s dealer compensation model comes after Acting Director Mick Mulvaney took over the CFPB in November 2017 and set a deregulatory tone for the regulator. Last week, Mulvaney reorganized the CFPB’s Office of Fair Lending and Equal Opportunity — which is responsible for pursuing cases of discrimination including disparate impact and dealer markup — under the director’s office and stripped it of its enforcement capabilities.
“The CFPB came in with an iron club and made us change the way we priced our product [in] our indirect auto purchasing [program] through auto dealerships, and that caused the substantial runoff in that business,” Chief Executive of BB&T Kelly King told investors during its fourth-quarter earnings call last month. “We believe we’re going to be, very soon, moving back to a more traditional auto pricing program like we had before. That will increase that volume into the auto portfolio and the spreads will remain good.”
Flat-rate dealer compensation, in part, contributed to BB&T’s drop in total auto outstandings to $13.4 billion in the fourth quarter 2017, compared with $14.2 billion during the same period the year prior. The bank held an auto balance of $15.1 billion at yearend 2015 — the year it switched its fee program — according to Big Wheels Auto Finance.
Now, BMO Harris is the only lender offering a flat-rate dealer compensation model, however, it too has changed from its original conception amid declining volume. In the summer of last year, BMO switched to a three-tiered flat-rate system that offers dealers a 1%, 3%, or 5% rate commensurate with the loan’s term. In both cases, the lenders are seeking more flexibility than the flat-rate system provided.
“We believe a more traditional auto pricing program will give our dealer clients more options and better flexibility while ensuring that consumers continue to be treated fairly,” Davis said. “BB&T greatly values our long-standing dealer relationships and we believe this new program will be well received.”