Dealer-Assisted Auto Financing Should Remain Accessible and Affordable

Actions by the CFPB Will Increase Costs and Decrease Access for Car Buyers

Issue
The Consumer Financial Protection Bureau (CFPB) issued “guidance” that threatens to eliminate dealers’ flexibility to discount the interest rate offered to consumers to finance vehicle purchases. The CFPB has attempted to fundamentally change and regulate the $783 billion auto loan market via informal “guidance” without prior public comment or hearing; answering specific questions by Congress from both sides of the aisle to justify this policy change; and first analyzing the impact of its guidance on consumers.  With the CFPB’s actions likely to raise the cost of credit for consumers, Congress must exercise its oversight role to demand greater transparency from this agency.

Background
The ability of the dealer to “meet or beat” their competitors’ rates produces vigorous marketplace competition that frequently provides customers a lower interest rate than the rates offered directly by banks or credit unions.  Approximately 80 percent of car buyers choose to finance their purchases through optional, indirect financing at dealerships.
 
In March 2013, the CFPB issued controversial guidance that threatens to eliminate dealer flexibility to offer consumers a discounted interest rate when arranging auto financing.  The guidance attempts to force auto finance sources into changing the way they compensate dealers to a flat fee. The CPFB is basing this industry change on a theory of “disparate impact,” or unintentional discrimination. 

The CFPB has not released any credible evidence to demonstrate that dealer assisted financing in today's market results in disparate impact.  Nonetheless, NADA has distributed a Fair Credit Compliance Policy and Program to its members to reinforce dealers' commitment to legal compliance and fair treatment of all customers, while maintaining a dealer’s ability to discount interest rates, which benefits consumers.  Dealers that adopt the plan start every transaction with a pre-set dealer compensation amount, and the interest rate can be discounted based on limited criteria that are not based on a customer’s background, such as meeting competitive offers.  

Key Points
• NADA strongly opposes any form of discrimination in auto lending.

• The CFPB issued “guidance”, without prior public comment or hearing, and without following the standard rulemaking process that threatens to eliminate the ability of dealerships to discount the interest rate offered to customers.

• The Bureau has failed to provide analysis to substantiate its auto finance guidance despite bipartisan calls for transparency from Congress, including two congressional oversight hearings and ten letters from both Democrats and Republicans.

• The CFPB released this guidance without studying the impact of its actions on consumers.  According to Fitch Ratings, the CFPB’s drive to eliminate “meet or beat” financing offered by dealers “will likely raise lender regulatory costs in 2014.”  Higher regulatory costs result in higher costs for consumers, which could price lower income consumers out of the credit market.
Status
Members of Congress are urged to exercise oversight to ensure that the CFPB’s roundabout attempt to regulate dealerships does not result in less competition that will harm consumers.

March 2014