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#50218 - 12/20/02 09:13 PM Dealer loans & interest rates
straw Offline
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straw
Joined: Nov 2002
Posts: 9,121
I was approached with a new program for dealer car loans. We would authorize dealers to charge of a range of interest for certain ratings i.e. A credit could be charged 5% to 7% interest.

The difference woudl in interest would be paid to the dealer, either entirely or split on a percentage basis.

Anyone know of a reason why we can't do this? My concern would be higher rates being charged to protected classes within same credit bands.

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General Discussion
#50219 - 12/20/02 09:18 PM Re: Dealer loans & interest rates
rlcarey Offline
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rlcarey
Joined: Jul 2001
Posts: 83,630
Galveston, TX
You may want to review this thread:

Fair Lending - Direct vs Indirect Pricing

My opinion hasn't changed and if you do use that type of a pricing scenerio, it needs very close monitoring.
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com

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#50220 - 12/20/02 09:23 PM Re: Dealer loans & interest rates
Anonymous
Unregistered

Our dealer loans have 4 tiers and each tier is based on a Credit report score. Wherever you score falls then that is the rate we charge. The dealer is allowed to charge a maximum of 3% above our rate. Our examiners have looked at this (FDIC) and found no problems with this type of rating system. We do monitor who gets charged the 3% as opposed to a lower retention rate to make sure they are not discriminating. Worked for our examiners....of course that doesn't mean it won't down the road but they seem satisfied.

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#50221 - 12/20/02 09:52 PM Re: Dealer loans & interest rates
rlcarey Offline
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rlcarey
Joined: Jul 2001
Posts: 83,630
Galveston, TX
When you say your examiners looked at it, does that mean they chose indirect lending within the scope of their fair lending review and actually performed an analysis? A three point spread seems to be pretty wide - have you run any actual internal statistical analysis against your indirect portfolio to see if there are any patterns outside of a spotcheck?

This brings up another point that I think is eventually going to be an issue also, basing pricing on the credit score. It is my opinion, that unless you can demonstrate actual charge-off ratios or other operating costs that support the spread in the pricing, you are setting yourself up for a disparate pricing problem.

For example, if you charge 2 percent more for loans in xxx-xxx credit score category and you multiply that by the total portfolio value in that range - say $1MM, you would be charging these customers $20,000 more a year in interest. Unless you incur a combination of costs between charge offs and servicing expense of $20,000, you are creating a desparate impact. If you're pricing in that manner, it might be in your best interests to be prepared to defend your pricing practices.

The insurance industry is coming under fire for the same credit score based pricing practices right now - banking can't be too far behind!
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

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#50222 - 02/14/03 06:19 PM Re: Dealer loans & interest rates
Anonymous
Unregistered

Just saw this post and will caution on one thing. We have a buy rate to the dealers and allow a 3% spread. That is not unusual, and some even go higher. Going back 10 years ago or so, when I was an F&I Manager at a dealer and then a buyer of dealer paper, you could go as high as you wanted. Anyway, since indirect lending is such a large part of our overall porfolio, the FDIC always examines it. They arbitrarily found, using surnames, that some protected classes were being charged higher margins, and this is not on a tiered pricing schedule. We argued that it was ridiculous to identify protected classes by surnames and gave examples of "anglo" names that were in fact members of a minority group. We also argued that it was unreasonable for us to ensure that our dealers were not discriminating when they contracted the customer. No no no, said them. It is the bank that is responsible to make sure this is not happening, which brings us to today where we send out notices to the dealers warning them that if we find non-compliance that we will terminate our realtionship, and also we perform an annual review based on the criteria the FDIC used.

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#50223 - 11/04/03 08:32 PM Re: Dealer loans & interest rates
Anonymous
Unregistered

We are trying to address monitoring of our indirect loans. We have a buy rate, a cap and share in overages above the cap. Are there others who allow this and if so, what type of monitoring are you doing?

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