Kelly’s Korner: The Right to Reserve
Q. What do you know about the California initiative to limit a dealership’s reserve participation to $150 per finance contract?
A. A February 1, 2004 Washington Post article described the efforts of the Consumer Federation of America to disclose dealer reserve, and to limit the amount of the reserve to $150 – $200 per finance contract. I know of few retail businesses that are required to disclose the profits they make on their transactions. Grocery stores do not disclose their profits; neither does a clothing store when you purchase a suit.
The Post article gives the reader only one side of the story. Yes, a dealership does make a profit on the finance transaction. AND the dealership provides additional protection for the consumer in at least four ways when the financing is arranged through the dealer’s agreement with a lender.
First, the title is the only collateral used to secure the loan through a dealer. In contrast, when the consumer contracts directly through their bank they give the bank additional collateral. How? When they open a checking and /or savings account with the bank, they receive a booklet describing the terms and conditions of deposit accounts. Among other things, this publication specifies the bank’s “right of offset” or “right of setoff”. Simply put, this offset or setoff permits the financial institution to use money in the consumer’s deposit accounts to satisfy any loan made directly with the bank. When additional collateral is at stake, it makes sense that the consumer may be able to obtain a lower A.P.R. with a direct loan from the dealer.
Second, when a consumer uses dealer financing they receive the protection of “Holder in Due Course”, in which the lender ultimately guarantees the performance of every policy they fund. It is the dealer-lender relationship that provides additional protection for the consumer, available only when a retailer arranges the financing of the product or services.
Third, in many cases the dealership has a recourse relationship with the lender, requiring that the dealership assume financial risk. In this scenario, if the loan goes into default the dealership may have to repurchase the loan from the lender.
Fourth, there are circumstances in which the dealership’s efforts and guarantees to the lender are the “magic” that allow some individuals to obtain financing. Without these arrangements, the number of consumers standing in line waiting for mass transportation would surely increase.
I believe that dealerships should be allowed to make a profit without hindrance from those who think the industry should be a non-profit business. These are often the same people who are the first to complain about no coffee in the dealership’s waiting room, old chairs in the offices, poor lighting in the showroom, and inadequate vehicle inventory on the property.
It takes profit to run a business. Profit provides customer amenities. Profit maintains a modern, well-equipped facility. It takes profit to turn on the lights and pay for flooring so that customers will enjoy a wide selection of vehicles.
The profits of dealerships provide jobs and contribute to the economic well being of the communities they serve. Do our detractors really want to risk the consequences of requiring dealers to sell vehicles below invoice and make $150 per finance contract?
Kelly’s Korner, OIADA Newsletter, March 2004, p. 19