the dealership nor the bank knows how many of the originally
scheduled payments will be paid and, consequently, how much of
the dealer reserve will materialize. Most dealerships do not want to
wait months or years to receive payment of the materialized dealer
reserve. To deal with these conflicting priorities, dealerships choose
among a number of dealer reserve payment programs offered by
banks and finance companies. Often, dealerships elect to receive less
than the full reserve payment at the time of contract origination.
In return, the dealership is subject to chargebacks of the reduced
dealer reserve for a relatively limited period of time, commonly
90 to 180 days. The reduced dealer reserve payment is typically 70
percent to 80 percent of the calculated dealer reserve at origination.
This reduction percentage is commonly called the dealer reserve
“split,” and that term can be the source of considerable confusion.
Some industry professionals describe the 20 percent to 30 percent
reduction as “retained” by the bank. However, on average, the 20
percent to 30 percent never materializes due to prepayment and
default of contracts. When the split is set at or above a certain
point, on average, no payment stream associated with the dealer
reserve is actually retained by the bank. Fair lending analysis
should consider whether the bank’s actual prepayment and default
experience supports the split. This fair lending risk is heightened
when a bank has an explicit policy of not participating in the
dealer reserve, and its actual prepayment and default experience
indicates that it is, in fact, retaining a portion of the dealer reserve.
Conclusion
We have identified some of the key fair lending compliance issues
associated with indirect automotive finance and methodologies
that may assist with the identification of any disparities resulting
from underwriting or pricing of automotive finance contracts.
In particular, we have identified the circumstances that make the
“regular analysis of loan data for potential disparities on a prohibited basis” in indirect automotive finance different from the
corresponding analyses in the mortgage lending arenas. 13 This area
of regulatory scrutiny continues to evolve, and modifications to the
focus or methodologies suggested will certainly change over time. ■
ABOUT THE AUTHORS
ARTHUR P. BAINES, vice president at Charles River Associates,
has more than 20 years of diversified business, economic, and
quantitative analysis experience. He is a leading expert in the retail
automotive industry, consumer finance, and indirect lending. He
has assisted numerous banks, automobile manufacturers, captive
finance arms, and other automotive lenders respond to regulatory
investigations and litigations. Baines has assisted numerous clients
in the design, implementation, and monitoring of governance and
compliance programs related to fair lending, conflicts of interest,
financial disclosure, and various consent decrees.
Baines has a bachelor’s degree in economics from the
University of North Carolina at Chapel Hill and a master’s in
economics from the University of North Carolina at Charlotte.
Reach him at abaines@crai.com.
DR. MARSHA J. COURCHANE, vice president and practice leader at
Charles River Associates, heads the Financial Economics Practice
in the U.S. and U.K. She specializes in financial institution analyses
for regulatory reviews and provides expert testimony in litigation
matters. She is a leading expert in the areas of mortgage and
consumer lending, engaging in research and analyses of mortgage
markets, discrimination in lending, consumer credit, securitization,
credit risk, and redlining issues.
Dr. Courchane has published in several journals, including
the Atlantic Economic Journal, Journal of Real Estate Research, Journal
of Economics and Business, Housing Policy Debate, Applied Economics,
Journal of Housing Research, Journal of Real Estate Finance and Economics,
Canadian Journal of Economics, Property Management, International Real
Estate Review, and Real Estate Economics. She serves on the editorial
board for the Journal of Housing Research, the Journal of Real Estate
Research, and for the International Journal of Housing Markets and
Analysis and referees for several journals. Dr. Courchane is a fellow
of the Weimer School of Advanced Studies in Real Estate and Land
Economics. She is a member of Counselors in Real Estate. She is
the executive vice president of the American Real Estate and Urban
Economics Association (2008 to 2013) and serves on the board of
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