Recent Actions by CFPB Will Increase Costs and Decrease Access for New Car Buyers
The Consumer Financial Protection Bureau (CFPB), without public hearing or comment, issued guidance that threatens to eliminate the ability of dealers’ to discount the interest rate offered to consumers to finance vehicle purchases. On a bipartisan basis, Congress has asked the CFPB to disclose the methods, analysis, and studies to justify this policy change. However, the CFPB has ignored Congress’ requests on multiple occasions or offered incomplete responses. Since the CFPB’s actions are likely to raise the cost of credit for consumers, Congress must exercise its oversight role to demand greater transparency from this agency.Background
Even with vigorous competition from banks and credit unions, approximately 80 percent of car buyers choose to finance their purchases through optional, indirect financing at dealerships. Auto dealers have relationships with a variety of financing sources and can discount rates offered to consumers to earn their business. The ability of the dealer to “meet or beat” their competitors’ rates produces intense competition in the marketplace that frequently provides customers a lower interest rate than the rates offered directly by banks or credit unions.
The March 21 CFPB guidance is an attempt to coerce auto finance sources into changing the way they compensate dealerships for arranging financing by effectively removing dealers’ current ability to discount finance rates for their customers. The CFPB is trying to force this change under a “disparate impact” theory of discrimination which relies entirely on interpreting statistics of past finance transactions. However, since the Bureau has refused to release to Congress the complete statistical methodology it employs to determine whether disparate impact is present, there is no way to conclude if their methods are valid, reliable, and can withstand scrutiny. Key Points
• NADA strongly opposes any form of discrimination in auto lending. Status
• The CFPB has not provided Congress essential information about the methodology of its statistical analysis of past transactions, or whether it is controlling for a variety of factors unrelated to the consumer's background that can affect finance rates. Thus, the possibility exists that the CFPB is coercing changes in the marketplace based on incorrect assumptions.
• The CFPB’s drive to eliminate “meet or beat” financing by auto dealerships is being done without transparency, the opportunity for public comment, and any apparent cost/benefit analysis into its effect on the competitive auto financing marketplace. If the CFPB wishes to regulate out of existence “meet or beat” financing, it should be done through a rulemaking where the merits of such a proposal will be transparent, and not through “guidance” to auto lenders.
• To ensure auto credit remains affordable, Congress must exercise its oversight role and compel the CFPB to justify how lessening competition among finance sources for auto loans is beneficial to consumers.
There is significant bipartisan Congressional interest, yet multiple letters from both the House and Senate have not resulted in meaningful transparency from the CFPB. Most concerning is that the bureau acknowledges it did not conduct any cost-benefit analysis to determine how its guidance on auto lending will impact the cost or access to auto credit. Dealers should urge their members of Congress to pursue greater oversight of the CFPB with the goal of keeping auto finance affordable and available.
Updated: November 2013