Fall · 1999 -- Volume 16 Issue 4
Contents
* 1997 - Year in Review *
A review of changes previously reported in of Interest!
Alabama -- The interest surcharge increased to 6% of the amount financed with a maximum of $120. August 1, 1997
New Prima Facie Credit Life and A&H rates were published. Single Life $1.23/$1000/mo and Joint Life 150% of single. 14 Day Retroactive A&H - $2.70/$100. October 1, 1997
The Banking Department issued an Interpretive Letter that states the amount of the surcharge is "insurable" up to $25.
California -- The dollar limit pertaining to the maximum charge exemption for motor vehicle sales transactions
was increased to $2,500 from $1,650. January 1, 1998.
Connecticut -- Small loan maximum increased to $15,000. October 1, 1997.
Florida - The dollar limits in the Florida Consumer Finance Act were increased to the following: 30%/$2,000/24%/$3,000/18%. October 1, 1997.
Kansas - The alternate 18% in the credit sales maximum UCCC structure was removed effectively deregulating credit sales transactions as far as maximum charges. July 1, 1997.
Louisiana - New Prima Facie credit life rates. Single Life $.90/$100/yr. Joint Life $1.35/$100/yr. Further decrease to take place in 1999. January 1, 1998.
"Payday" loan law enacted (Act 41). August 15, 1997
Oklahoma -- Increase in UCCC dollar adjustments to 330% of the original amounts. July 1, 1997.
Attorney General opinion that "B" loans must be refinanced as "A" loans in regards to handling fees and acquisition charges.
Texas - Increase in dollar amount adjustments in the Texas Code to 450% of the original amounts. July 1,1997.
Home Equity Loans allowed. October 1, 1997.
Virginia -- New Prima Facie Credit Insurance Rates Published. Single Life $.6129/$1000/mo. Joint Life 165% of single. 14 Day Retroactive A&H 12 month rate - $2.41/$100.
The Web Quoter for consumer lending is the first in a series of products Carleton will be offering for handling loan origination on the Internet. Future plans inlcude Web Quoting for Mortgage Lending as presently provided on our PC product. We are nearing completion of a project that quotes loans along with printing loan contracts and insurance certificates, all on the Web.
The Web Quoter contains a surprising amount of flexibility and quoting capability for an open access product. Like all Carleton products, the format, display, and computations can be customized to fit the specific needs of your financing operation.
Also, take time to find out about the following from Carleton and Financial Publishing Company:
- PC Loan Origination Software
- The Cost of Personal Borrowing
- Consulting and "Black Box" Computing Solutions
- College 'Scope Online Service
From Our Research Dept.....
Do You Have Reservations About Dealer Reserve Calculations?
Over the years a symbiotic relationship between financing institutions (banks, finance companies etc. hereby referred to generically as the "bank") and auto dealers has evolved where the auto dealer sells a car, which the buyer finances. The dealer then sells the loan to the bank freeing up the cash so the dealer can buy more cars.
The relationship is similar to the primary and secondary mortgage arena where a bank writes a mortgage then sells it to Fannie Mae or Freddie Mac. Fannie/Freddie buy the loan for face value.
There is a difference. In a mortgage loan the bank charges and keeps points. In an auto loan transaction, where there are no points, the bank buys the loan at a lower interest rate than the car buyer is paying. The point spread is paid to the dealer.
The interest rate paid by the car owner is sometimes called the "Sell" rate. The interest rate required by the bank is called the "Buy" or "Bank" rate.
Over the years, various schemes to disburse the spread have evolved. The subject of this analysis is the cash flows and yields of three such schemes, Present Value, True Yield, and Future Value. Bear in mind that Financial Publishing Company, and it's parent company Carleton, Inc. neither condemns nor condones any of these methods.
For the purposes of illustration we will use a simple loan transaction of:
| Amount Financed | $10,000.00 |
| Number of Payments | 12 |
| Interest Rate ("sell" rate) | 10% |
| Bank Rate ("buy" rate) | 8% |
| 11 payments @ | $879.16 |
| 1 payment @ | $879.13 |
Before we illustrate the various methods that could be used to pay the point spread to the dealer we need to show the amortization of the car owner's loan as originally scheduled.
|
No. |
Payment |
Interest |
Principal |
Balance |
|
1 |
$879.16 |
$83.33 |
$795.83 |
$9,204.17 |
|
2 |
$879.16 |
$76.70 |
$802.46 |
$8,401.71 |
|
3 |
$879.16 |
$70.01 |
$809.15 |
$7,592.56 |
|
4 |
$879.16 |
$63.27 |
$815.89 |
$6,776.67 |
|
5 |
$879.16 |
$56.47 |
$822.69 |
$5,953.98 |
|
6 |
$879.16 |
$49.62 |
$829.54 |
$5,124.44 |
|
7 |
$879.16 |
$42.70 |
$836.46 |
$4,287.98 |
|
8 |
$879.16 |
$35.73 |
$843.43 |
$3,444.55 |
|
9 |
$879.16 |
$28.70 |
$850.46 |
$2,594.09 |
|
10 |
$879.16 |
$21.62 |
$857.54 |
$1,736.55 |
|
11 |
$879.16 |
$14.47 |
$864.69 |
$871.86 |
|
12 |
$879.13 |
$ 7.27 |
$871.86 |
$0.00 |
|
Totals |
$10,549.89 |
$549.89 |
$10,000 |
|
Present Value Approach
A dealer reserve situation can be viewed as the bank purchasing a series of future cash flows, in this case the payments the car owner is scheduled to make.
Use of the present value scheme involves computing the amount an investor should pay, in this case the bank, to receive those payments and yield the buy rate. In our example, the buy rate is 8%, and as evidenced by the schedule below, the appropriate amount is $10,106.60 for the given payment stream.
|
No. |
Payment |
Interest |
Principal |
Balance |
|
1 |
$879.16 |
$67.38 |
$811.78 |
$9,294.82 |
|
2 |
$879.16 |
$61.97 |
$817.19 |
$8,477.63 |
|
3 |
$879.16 |
$56.52 |
$822.64 |
$7,654.99 |
|
4 |
$879.16 |
$51.03 |
$828.13 |
$6,826.86 |
|
5 |
$879.16 |
$45.51 |
$833.65 |
$5,993.21 |
|
6 |
$879.16 |
$39.95 |
$839.21 |
$5,154.00 |
|
7 |
$879.16 |
$34.36 |
$844.80 |
$4,309.20 |
|
8 |
$879.16 |
$28.73 |
$850.43 |
$3,458.77 |
|
9 |
$879.16 |
$23.06 |
$856.10 |
$2,602.67 |
|
10 |
$879.16 |
$17.35 |
$861.81 |
$1,740.86 |
|
11 |
$879.16 |
$11.61 |
$867.55 |
$873.31 |
|
12 |
$879.13 |
$5.82 |
$873.31 |
$0.00 |
|
Totals |
$10,549.89 |
$443.29 |
$10,106.60 |
|
The difference between the present value of the future cash flows discounted at the "buy" rate ($10,106.60) and the customer loan amount ($10,000.00) is the "dealer reserve". This amount, $106.60 is disbursed to the dealer immediately, and no further disbursements are made.
True Yield Approach
The True Yield approach can be explained quite simply: the car buyer pays 10% on the principal outstanding, the bank keeps 8% and the dealer gets 2%.
The following chart shows the outstanding balances from the schedule we developed to illustrate the original transaction. Each balance has been outstanding for a month. We then show 10% interest on that balance, 8% on that balance and, finally, 2% on that balance.
|
No. |
Balance |
10% Interest |
8% Bank |
2% Dealer |
|
1 |
$10,000.00 |
$83.33 |
$66.67 |
$16.66 |
|
2 |
$ 9,204.17 |
$76.70 |
$61.36 |
$15.34 |
|
3 |
$ 8,401.71 |
$70.01 |
$56.01 |
$14.00 |
|
4 |
$7,592.56 |
$63.27 |
$50.62 |
$12.65 |
|
5 |
$6,776.67 |
$56.47 |
$45.18 |
$11.29 |
|
6 |
$5,953.98 |
$49.62 |
$39.69 |
$9.93 |
|
7 |
$5,124.44 |
$42.70 |
$34.16 |
$8.45 |
|
8 |
$4,287.98 |
$35.73 |
$28.59 |
$7.14 |
|
9 |
$3,444.55 |
$28.70 |
$22.96 |
$5.74 |
|
10 |
$2,594.09 |
$21.62 |
$17.29 |
$4.33 |
|
11 |
$1,736.55 |
$14.47 |
$11.58 |
$2.89 |
|
12 |
$ 871.86 |
$7.27 |
$5.81 |
$1.46 |
|
Totals |
|
$549.89 |
$440.01 |
$109.88 |
The amount of dealer reserve with this method would be the total of the 2% column or $109.88.
The Future Value Approach
Another popular method of determining and allocating dealer reserve amounts is to run and compare two transactions. One at the car buyer rate and one at the bank rate. The amount of the loan does not change. The total interest computed on the lower bank rate (hypothetical transaction) is subtracted from the total interest on the higher (actual transaction) car buyer rate.
In our example transaction, the consumer needs to make 11 payments of $879.16 and a final of 879.13 for a total of payments of $10,549.89. That value subtracted from the $10,000 principal leaves $549.89 in interest charges.
If the same $10,0000 principal is computed at an 8% annual interest rate, then 11 payments of $869.89 plus a final payment of $869.81 would amortize the loan amount. The total of payments would be $10,438.60. Subtracting the principal amount of $10,000 would leave $438.60 in interest charges.
|
No. |
Payment |
Interest |
Principal |
Balance |
|
1 |
$869.89 |
$66.67 |
$803.22 |
$9,196.78 |
|
2 |
$869.89 |
$61.31 |
$808.58 |
$8,388.20 |
|
3 |
$869.89 |
$55.92 |
$813.97 |
$7,574.23 |
|
4 |
$869.89 |
$50.49 |
$819.40 |
$6,754.83 |
|
5 |
$869.89 |
$45.03 |
$824.86 |
$5,929.97 |
|
6 |
$869.89 |
$39.53 |
$830.36 |
$5,099.61 |
|
7 |
$869.89 |
$34.00 |
$835.89 |
$4,263.72 |
|
8 |
$869.89 |
$28.42 |
$841.47 |
$3,422.25 |
|
9 |
$869.89 |
$22.82 |
$847.07 |
$2,575.18 |
|
10 |
$869.89 |
$17.17 |
$852.72 |
$1,722.46 |
|
11 |
$869.89 |
$11.48 |
$858.41 |
$ 864.05 |
|
12 |
$869.81 |
$ 5.76 |
$864.05 |
$0.00 |
|
Totals |
$10,436.40 |
$436.40 |
$10,000.00 |
|
The difference in the interest charge at 10% ($549.89) and interest charges at 8% ($436.40) represents the dealer reserve of $113.49.
|
Present Value |
$106.60 |
|
True Yield |
$109.88 |
|
Future Value |
$113.49 |
As you can see, there are a number of ways to "skin the cat" when it comes to computing a dealer reserve value. Keep in mind that these represent a very basic financing transaction.
Which approach is best for your situation? That probably depends upon a number of variables such as the effect of early payoff by the consumer using any of these approaches and the timing of the payment of the dealer reserve amount.
This article has "set the table" and presented the basics. In our next issue, we will discuss some of the effects of early payoff and timing of payments to the dealer.
As always, we welcome your questions and comments about this, or any other topic, subject. Give us a ring at the Research Department at (574) 243-6047, or e-mail your comments and questions to us.
Distribution of this newsletter is made with the understanding that the information contained herein has not been certified as legally acceptable for any particular statute, law, or regulation. For more timely and detailed information, subscribe to our Consumer Finance Newsletter and/or The Cost of Personal Borrowing in the United States compliance guide which are both published and updated ten times a year.
Carleton Inc. corporate offices are located in South Bend, IN with one wholly owned subsidiary: Financial Publishing Company, in Boston, MA. The Carleton companies provide over 30 years of financial computation experience to the consumer credit and mortgage industry.
