May 8, 2014

BMO Harris Bank first sizable lender to adopt flat rate financing

The Consumer Financial Protection Bureau has been pushing U.S. lenders offering auto loans through car dealerships to price this debt using a flat-rate structure, and BMO Harris Bank was the first sizable financial institution to adopt this approach.

CFPB advocates flat-rate auto loan pricing
The government agency has been advocating this strategy in its efforts to prevent lender discrimination against certain protected groups like minorities, according to American Banker.

The CFPB praised BMO Harris Bank for its decision.

"It is encouraging to see BMO Harris taking this proactive step to protect consumers from discrimination," CFPB Director Cordray stated. "When people go to buy a car, they should not have to worry whether they'll pay more for their auto loan because of their race, gender, or ethnic background. The CFPB is committed to creating a fair marketplace for all consumers, and we recognize that many lenders share that commitment as well."

In April, BMO Harris Bank started paying dealerships a flat fee of 3 percent of the amount financed, up to $2,000, according to Automotive News. These terms apply to loans that have a repayment period of 36 months or more. A spokesman indicated the company offers loans with shorter time frames, but doesn't give auto dealers a fee for them.

Market expert predicts broader shift
Ira Rheingold, executive director of the National Association of Consumer Advocates, told the media outlet that BMO Harris Bank's decision could signal a broader trend of industry participants moving toward flat-rate auto loan pricing.

"I would hope and expect other lenders would do it," he told the news source.

Obviously, nobody knows what the future will hold. Some auto lenders and dealerships have warned about the unintended consequences of a flat-rate pricing system being used more widely, according to American Banker. The CFPB has stated that it does not want to strong arm lenders into using a structure like this, but instead wants them to look into new ways of pricing their loans.

However, if more banks embrace flat-rate pricing, the development could facilitate loan sales. Currently, lenders pay a wide range of premiums to auto dealers, and this situation can complicate the sale of this debt. By working with flat rates, lenders will make auto loans more homogenous, and therefore easier to trade on the secondary market.

Financial institutions interested in loan sales might consider contacting Garnet Capital Advisors, which has significant experience in this area.