CFPB Issue, Support for Franchised Dealer Network among Topics Discussed at Auto Forum

David Westcott — April 2013

COMMENTARY
   David Westcott
Westcott
2013 NADA Chairman

Industry leaders and analysts were upbeat about the economy in their presentations to the 2013 Automotive Forum, held last month in New York City. They all agreed that auto sales are rising and economic momentum is growing.

Nearly 400 dealers, OEM and supplier executives, analysts and media convened to look at global issues shaping the auto industry, the state of the economy and the challenges facing new-car dealers and their customers. The forum was hosted by the New York International Auto Show.

Participants were upbeat about the recovering economy, expanding credit and a growing demand for newer inventory to replace aging fleets. The consensus among top analysts was that new-vehicle sales will exceed 16 million units by 2015.

The forum—presented by the National Automobile Dealers Association, J.D. Power & Associates and the Greater New York Auto Dealers Association—included keynote speaker Bob Carter, vice president of automotive operations for Toyota Motor Sales, U.S.A.; Finbarr O’Neill, president of J.D. Power and Associates; and Nariman Behravesh, IHS chief economist. All three were optimistic about the sales outlook for 2013 and beyond.

With historically low rates on auto loans and automakers “bringing out damn good cars,” Carter said that Toyota predicts 15.3 million new vehicles will be sold in the U.S. this year. 

Maryann Keller, a long-time industry consultant, also delivered a presentation in support of the current franchised dealership model, and argued against Telsa Motors’ approach to selling its electric vehicles directly to the public through factory-owned stores.

“Factories have learned that they cannot do a better job than independent business men and women at the retail level,” Keller said. “And new startups – many who come and go – with new systems of selling and servicing retail automobiles will all reach the same conclusion: the dealer network is the best way.”

The forum gave NADA an opportunity to directly address another issue of major concern: Recent “guidance” from the Consumer Financial Protection Bureau (CFPB) threatens dealer-assisted financing as we know it.

In March, the CFPB released a bulletin that claims indirect lending through dealerships may result in minorities paying more for auto loans.

Dealers are exempt from CFPB oversight, but auto lenders are not.

So the Bureau’s guidance could drastically change how auto finance sources compensate dealers for arranging auto loans.
 
Keep in mind, no one is accusing anyone of intentional discrimination.

The Bureau issued its guidance based on a theory called disparate impact.

If the auto finance system can potentially result in minorities paying more for credit than non-minorities in the same credit tier, then it is considered unintentional discrimination. And the system needs to be addressed.

But we have no idea how the CFPB concluded disparate impact exists in today’s marketplace.

Disparate impact can only be proven through a statistical analysis of past transactions, but the CFPB has not revealed how it is conducting its analysis or what data it’s relying upon.

There is also no indication that the Bureau has studied how moving to a “flat fee” compensation method would impact the marketplace. Eliminating a dealer’s ability to discount the credit rates would ultimately affect the amount consumers pay for credit. Dealer-assisted financing—which is optional—increases access to and reduces the cost of credit for millions of Americans.

Our customers overwhelmingly choose dealer-assisted financing because it’s convenient and competitive.

Before this consumer-friendly model is disrupted, the CFPB should explain how it is conducting its analysis. The Bureau also should demonstrate the effect flat fees would have on today’s intensely competitive auto financing market.
 
It also needs to coordinate its actions with the federal agencies that directly regulate dealers.

And it should provide the public an opportunity to comment on its assumptions and proposed actions.   

The need for transparency, reliable data analysis, interagency coordination and public comment are clearly warranted when there are attempts to change the compensation method of a $783 billion market.

This is an issue that’s likely to be at the forefront for some time, so stay tuned.

Dave Westcott
NADA Chairman