American Banker: Car Dealers Fight Back Against CFPB Auto Financing Rule

by Jeff Sovern

Here. The piece begins:

 Auto dealership advocates are warning that costs will rise for borrowers if the Consumer Financial Protection Bureau presses banks to curtail auto loan markups determined by dealers.

The warning followed the CFPB's bulletin this week that said banks are responsible for discrimination if their partner dealers mark up the interest rates on loans for minority borrowers or engage in other fair lending abuses. The agency is encouraging lenders to adopt a flat-fee model for dealer compensation.

But dealer industry representatives said doing so would hurt competition and ultimately boost car prices.

Of course, the industry always argues that regulation will increase costs.  But in this case, it's not clear why that would occur.  At present, some lenders sometimes tell dealers the lowest rate they would provide a particular consumer and then allow the dealer to negotiate a higher rate.  The Bureau claims that some dealers respond to that ability to negotiate by consistently charging higher rates to protected groups. If dealers can no longer bargain for a higher rate, won't everyone get the lowest rate, including protected groups?  Or is the thinking that lenders will increase the lowest rate they will charge to offset the loss from discriminatory pricing? In that case, some groups will pay higher rates than they now get because of disrimination. It's hard to see as a bad thing that some consumers won't benefit from discrimination that others pay for. 

0 thoughts on “American Banker: Car Dealers Fight Back Against CFPB Auto Financing Rule

  1. Gary Rademaker says:

    Mr. Strong – I apologize, I realize that I did not address your assertion that dealer collusion would be necessary in order for the price of automobiles to increase. Collusion would NOT be necessary. The final selling price of an automobile is, almost always, negotiated. Manufacturers and dealers already advertise them at a price that they are will to negotiate from. The final selling price that consumers pay will increase, because the dealers will negotiate down by a lesser amount than they do currently. This does not equate to collusion – simply an adjustment to a changing business landscape. The impact of this price increase will unfortunately be transparent, as no historical statistical data exists – and in the future, this type of data is unlikely to be collected.

  2. Gary Rademaker says:

    Pursuant to your reference to your personal experience, I will share my own. I am not in the automobile business, but I understand the opportunities dealers have to negotiate rates. Each time I have purchased a vehicle, I have entered the dealership with a pre-approval in hand from a credit union. In every instance, the dealership has beaten the rate I obtained from the credit union.
    As far as citing a reference to a study of interest rates, I will provide you with the following excerpt from one of the three roundtable discussions conducted by the Federal Trade Commission in 2011. This excerpt is directly from the FTC transcript of the April 12, 2011 roundtable, so the loose grammar and sentence structure is a result of the fact that it is a conversational transcript.
    I think you’ll find it interesting to note that the first quote is from Delvin Davis, Senior Research Analyst at the Center for Responsible Lending – a consumer advocate arguing against indirect auto financing. Even Mr. Davis states that credit unions are being priced out of the market by dealer indirect financing.
    You’ll find that a reliable study is hard to come by, as the statistical foundation of the data is suspected to be unreliable. The Federal Reserve Board is currently in the process of improving the reliability of the data analysis. However, in order to provide the cite you requested, this excerpt references statistics released by the Federal Reserve Board indicating that year after year, loans arranged through indirect auto lenders have significantly lower interest rates vs. those available from commercial banks. Here’s the excerpt:
    • Delvin Davis: Actually, it’s on a previous question, but just to kind of respond, the credit union is being priced out of the market. It is — They are not willing to participate in the dealer markup construct, either because of a pricing reason or just because of reputation. They’re trying to do what’s best for their consumers. But one thing to kind of note that — Since dealer-assisted financing is optional, I would push back against that a little bit, because that may not be the case for all credit tiers. I think we’ve heard from previous panel that people in the subprime tier — they have less options where to go, where to shop, and have less of a negotiating power when they get to the F&I office. So the dealer they get — they have to use the F&I office as a gatekeeper.
    • Peter J. Sheptak: But it goes from 2006 through 2010. And I unfortunately didn’t have a — I wanted myself to verify this by speaking to an economist at the Fed, that I haven’t had a chance to do that. But it seems to indicate, for a 48-month new-car loan, it shows the average interest rate that you obtain through a bank and then it also shows the average interest rate you obtain through an auto-finance company. The person I spoke with in their public-affairs office — it seems as if the auto-finance company really means direct lending — or indirect lending, excuse me. And the rates for 2006 were 7.72% were bank, and 4.99% through the auto dealer. 7.77% for 2007 versus 4.87%. 2008 was 7.02% versus 5.52% and on and on. So it seams to show that there is an actual lower retail rate that consumers pay through a dealer than through a direct-lending scenario. Again, I may be misinterpreting it, so I want you to verify this independently, but this is the data that’s in, again, the G.19 Federal Reserve statistical release from April the 7th.

  3. Howard Strong says:

    Mr. Rademaker’s comments are interesting, but do not comport with my own experience.
    First, financing with the dealer is pretty much a guaranteed loser for the buyer since much better rates (unless subsidized by the mfg) are available from other sources-e.g., credit unions. Thus a very recent purchase of a Toyota showed the dealer wanted around 8% interest on the loan it was pushing to a purchaser with a high credit score (VWQ or very well qualified in dealer talk), credit union offered 1.49% and eventually the deal was closed with zero percent from Toyota Finance.
    I’d love to see an objective, non dealer related, study that even suggests that dealers ever offer a better rate than available elsewhere. How about a cite to such from Mr. Rademaker?
    As to the idea that dealers will somehow make up the vast sums they are taking in from high priced financing else where–if you believe in a competitive market very hard to see how this could happen absence collusion of sale prices which would, of course, be unlawful.

  4. Gary Rademaker says:

    Jeff – dealership advocates are correct. ALL consumers will pay more for financing and potentially ALL consumers will pay more for the vehicles they purchase. Here are the reasons: The indirect lenders provide dealers with what can be referred to as a “wholesale” interest rate. This wholesale rate is NOT a rate that is available directly to consumers. The dealer marks the wholesale rate up to a RETAIL rate. The reason this is appropriate is because dealers are the distribution network for the lenders – they bring the customer to the lender, they ensure that all federal and state financial regulations are met in processing the transaction, and they also take on what is referred to as “warranties and representations” on behalf of the lender. Warranties and reps include assurances regarding the customers’ identity as well as the condition of the collateral and the financial structure of the sale. Because the dealer takes on these responsibilities, they lower the lenders’ cost of doing business. Therefore the lenders pass the savings on to the dealer, and allow the dealer to make some profit for their role in financing transaction. Lenders allow the dealer to determine the amount of profit they wish to make on the financing. There are caps in place, and dealers are also limited on the profit they can make due to local competition – they can’t charge the customer more than the local bank or credit union, otherwise the customer will go there for their financing, and the dealer won’t make finance profit. It’s a basic free market control. The reason industry advocates say that consumers will pay more, is due to the fact that dealers quite frequently BEAT the rate from the local bank, so that they can be assured that they will make some profit on the financing. This scenario creates competition in the free market, and forces local banks to keep their rates competitive. Without the ability to adjust rates in this manner, dealers will not be able to provide the best financing deal for the customer – their hands will be tied, and the customer will pay more. The lack of competitive pressure will allow rates to increase. Additionally, since dealers will be restricted in the amount of profit they can earn in the finance department, they will have to make up the lost revenue somewhere – and that will be in the price of the vehicles they sell. In the end, consumers will lose and dealers will lose….and your tax dollars will have paid for making it all happen.

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