By on October 9, 2014

car salesman battle brigade

According to National Automobile Dealers Association chair Forrest McConnell, the United States government’s plan to tighten automotive finance regulations amounts to an attempt by said government “to take away the consumer’s right to get a discount.”

Autoblog reports the Consumer Financial Protection Bureau wants to further extend its reach in the industry, arguing that a flat-fee system would provide more transparency and prove beneficial to consumers over the current discretionary interest rate system, which the agency claims can be used to discriminate against certain groups of customers.

McConnell returned fire, proclaiming the CFPB’s reasoning as “flawed,” and that dealers are against discrimination:

Dealers have to discount those rates to be competitive. The current system saves customers money. Period.

At stake are 87.4 million outstanding loans worth over $900 billion as of Q1 2014, 90 percent of which originate from 38 auto finance companies that would fall under the proposed CFPB regulations.

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46 Comments on “NADA, CFPB Fight For Future Of Automotive Financing...”


  • avatar
    dwford

    The only discrimination in the current system is against bad negotiators. It is not in the finance managers personal best interest to give away profit to customers of a preferred skin color. The finance manager’s motivation is the same as the salesman’s – commission. If the government thinks that discretion in the finance department is “discrimination” then the same “discrimination” occurs at the salesman’s desk, and at every other transaction where the price is negotiable. Is the government going to outlaw negotiation?

    • 0 avatar
      Erikstrawn

      The problem with the theory of the economic man who makes the decision that is best for him, is that it ignores both incompetence and altruism. Finance managers do discriminate, not because they want to, but because they don’t realize they’re doing it. The bigger issue here is not discrimination, but rather loose lending laws that reward lenders who write unsound loans in order to package them up and sell them to investors.

    • 0 avatar
      Dirk Stigler

      The short answer is yes, if the people running the government these days have their way, they’ll take away as many choices as they can, so that they can force people into just a few ways of doing things, all entirely under their control.

      Some of them want that for base reasons–they like the power. Others really believe they’d be doing us all a favor. That last one is the truly evil thought pattern, because it’s based on assuming the rest of us are too stupid and/or malicious to make the “right” choices on our own, and it makes them feel like they’re enlightened do-gooders, instead of the monstrous totalitarians they actually are.

      • 0 avatar
        kosmo

        I have nothing to add to that. Very nicely put.

      • 0 avatar
        Erikstrawn

        If the NADA doesn’t want government intervention, they need to create a standard for lending that doesn’t threaten banks, investors, and customers. If they don’t self-regulate they will get regulation forced on them. I am fine with that.

        • 0 avatar
          stuki

          What kind of dealer would threaten customers?

          Banks are nudge-nudge wink wink “threatened”, by themselves knowingly setting lax standards for granting loans. That way they can pay themselves bonuses upfront on the money each loan will supposedly make over term. Then, when the borrower can’t pay, taxpayers and all those with dollars to debase will step in.

          Take the taxman and money printer out of the equation, and there is absolutely no theoretical nor practical manner in which the system will not self regulate.

          Doing so will cut the paychecks of incompetent finance dweebs, and leave loads of incompetent tax feeders without a cush pension, though. Which is why it is not done. So, instead, a “solution” must be found that creates even more jobs for useless leeches. And even less accountability for incompetent finance dweebs.

          That’s life in Dystopia.

        • 0 avatar

          NADA lacks the power to create a “standard for lending.” They represent car dealers, not bankers.

          • 0 avatar
            Erikstrawn

            Every dealership has a finance office, and that’s where the shenanigans start. They DO have the power to say no to which loan products they sell. Are you going to tell me they don’t sell loans?

          • 0 avatar

            Exactly what “shenanigans” do you refer to?

            Non BHPH dealers do NOT loan money. They originate loans on behalf of the lenders they represent. What exactly are “loan products?” What control does NADA have over that? Are you sure you understand what NADA does and does not do?

            If you think NADA can get dealers together and decide what they will and will not sell in the F&I office, you probably have never heard of the FTC.

      • 0 avatar
        ReSa

        “…because it’s based on assuming the rest of us are too stupid and/or malicious to make the “right” choices on our own.”

        What about the mortgage crisis…? Poor choices by a large group of people induced by a poorly regulated financial market. Who took the hit for their mistakes? Also people who generally were smart enough to make ‘right’ choices for themselves…

    • 0 avatar
      greaseyknight

      I’m in a line of work where we see alot of car loans with high interest rates, that are underwater, on POS cars.

      We use the term “Unsophisticated”, these folks don’t know whats going on with their credit report (and its full of unpaid bills) so they are just happy to get a car loan at all because “I need to get back and forth to work”. Sure, 20% on a Sebring is a great financial move. I really don’t blame the lenders for the interest rate, as they are taking on a great deal of risk with the loans.

      I have a theory, that higher rate of African American women who are getting these loans is because they need a car to take care of their kids. They are doing their best to be the responsible parent, but are struggling as a single parent who’s made some poor financial decisions. And the father of the kids is totally out of the picture. Its not a financial problem per se, but a social one.

      • 0 avatar
        28-Cars-Later

        If I were a bank issuing subprime loans at 20%, I’d sleep better at night knowing my loans were issued for cars with strong resale as opposed to JS platform Sebrings/Avengers which take a 40% dive the minute they are titled. When I end up repossessing one out of three of them at least I might break even on the loan after collected interest and auction.

        • 0 avatar

          The subprime and BHPH auto lenders know what they are doing. They entered the business knowing a third of their loans would default and constructed a business around that.

          The primary reason this type of lending is doing so well is that millions of credit scores were maimed as a consequence of the Great Recession. People are going back to work and need cars to get there. Who else would serve that market?

    • 0 avatar
      Xeranar

      This is always such an interesting and completely unfounded perception of reality. There are far more factors that go into a sales deal of this magnitude than your churlishness and dashing good looks. If anything all your self-aggrandizing if measured against industry averages and your personal history would amount to about an average rate. Maybe a .2 or .5% off the average, but you aren’t going to ‘John Galt’ your way into a lower rate.

      The simple response is this:
      You’re one citizen. The Dealership sells 1000s of vehicles a year. If you refuse their rate they can afford to let you walk because the money is coming in other ways. When enough dealers realize they can just hold you hostage by refusing to deal that’s called collusion and is largely legal as long as it is market-based and not actually acknowledged. So all this argument about ‘profit’ as if it doesn’t come from each of us is a bit ‘pie-in-the-sky’ about realities.

      But again, I suspect your delusional on your ability to haggle.

      • 0 avatar
        28-Cars-Later

        Prior to the current depression, subprime buyers were typically people who had been making significant mistakes in life since grade school. I think now the pool is much larger as people who were otherwise average from a socioeconomic perspective fell on hard times due to said depression. I do believe in redemption and I do have empathy for people who made one big mistake and are trying to make their way back. I do not have empathy for people who continually make poor decisions. Credit score is a metric for determining the type of decisions a person chooses to enact, whether we like it or not. Poor credit typically equals poor decisions which indicates increased risk and higher rates, its just that simple.

        • 0 avatar
          Xeranar

          Actually the evidence points not towards the poor who created the subprime bubble but largely over-leveraged white suburbanites who bought too big a home and made more than the average household income. It was largely the stretching middle-class who have been prayed upon by subprime lending because subprime lending was intentionally tightened to generate more profit. But yes, lets keep the myth of ‘poor people are the reason we suffer through poor credit.’

          • 0 avatar
            28-Cars-Later

            I do not disagree but the who/what/when/why of something which already happened eight years ago is not relevant to the topic of predatory subprime auto loans. What is relevant is the fact previously “ordinary” people as the result of the aforementioned depression have been drawn into a subprime buyer’s pool previously encompassed by people with low credit due to poor life decisions. I sincerely hope people currently in subprime territory can recognize the situation and pull themselves out of it eventually. Those who fail to recognize or react to the situation they find themselves in will continue to perpetuate whichever stereotype applies. Where I come from, we call them sh!tbags.

  • avatar
    Hummer

    Bring back high interest rates, that would get automakers working on cost concerns instead of just driving up costs and justifying it with 8 year loans.

  • avatar
    cbrworm

    The whole negotiation process from start to finish is one of the reasons I have no plans to buy any more new vehicles. Used CPO vehicles I seem to have better luck negotiating (more wiggle room?), and private sellers that have reasonable expectations. I don’t typically finance using the dealer financing, but the whole F&I process is still frustrating.

    • 0 avatar

      I have agree. Ask most folks in the street and they will decry the whole negotiating process at Car Dealerships. Hell, Carmax makes a living off this sentiment. There does need to be some kind of overhaul and the dealers have not self regulated this issue, I would prefer to see the states be steering the regulation process, not the Federal Government

    • 0 avatar
      S2k Chris

      “The whole negotiation process from start to finish is one of the reasons I have no plans to buy any more new vehicles. Used CPO vehicles I seem to have better luck negotiating (more wiggle room?), and private sellers that have reasonable expectations.”

      This mindset makes no sense to me. People who evaluate the deal they got solely on the basis of discount percentage from asking are, shall we say, less than bright. Some cars seems artificially marked up and deep discounts are given to bring them back to normal (Fords), where others seem to be pretty fairly priced in the first place. If you are happy with the price paid, and it’s in line, more or less, with the overall market for that vehicle, why in the world does the amount negotiated off matter? A fair price might be $500 off, it might be $5k off, what difference does it make as long as it’s a fair price?

    • 0 avatar

      If you can’t run with the big dogs, stay on the porch.

  • avatar
    Conslaw

    “Discount”? Nobody ever gets a “discount” over what the finance company will take. It’s all a matter of what gets added on. In theory, if you pay anything over the lowest rate, you are supposed to get an Equal Credit Opportunity Act notice telling you why you were charged more. Car dealers NEVER give ECOA notices. The same thing is happening at car dealers as happened with mortgage lenders, when the salespeople have discretion (and usually incentive) to charge people more than the lowest rate, the higher charges skew along racial lines. When the CFPB was created, a deal was cut to keep auto finance companies out of the CFPB regulation, but the captive finance companies were warned that if they kept pulling the same crap they might be brought in to CFPB jurisdiction. They not only kept pulling the same crap, but it seemed to get worse.

    Not only are they jacking up the rates for certain customers, they are committing fraud on an industrial level at the application stage, usually by inflating applicant income. Although dealers blame it on the applicants, usually it is done without the knowledge of the applicant. (This was shown by a recent story in the New York Times where an applicant found out that her application was sent in with a forged copy of her driver’s license which listed the address of the F&I person at the dealership.)

    If it seems like I don’t like auto dealers, you’re right. Last year a dealer caught my 78 year old mother in a “senior moment” and added $5,000 of add-ons on top of FULL MSRP of a Honda Civic. IMHO, freedom to contract shouldn’t mean “open season on grandma”.

    • 0 avatar

      You seem to misunderstand the NADA recommended program for dealers to use.

      RE: “The same thing is happening at car dealers as happened with mortgage lenders, when the salespeople have discretion (and usually incentive) to charge people more than the lowest rate, the higher charges skew along racial lines.”

      Using Bayesian Improved Geocoding Surname “technology” the CFPB found that black borrowers were charged about a 1/3 of a percent more “margin” than borrowers as a whole by ALLY Bank through their dealers. The dealers weren’t accused of “willful discrimination.” The CFPB doesn’t have authority over dealers unless they are of the BHPH variety. SO lenders are held responsible for actions of their dealers even when there is NO EVIDENCE of ANY willful discrimination. Further, the technology they use to make the allegations are suspect at best with HUGE margin for error. The CFPB will not say how they want the system to change. They won’t issue “protected class” membership cards so dealers can identify those who are supposed to be dealt with differently than the rest of the borrowers. Dealers are supposed to mind read, I guess. They will NOT recommend a particular method of compensating dealers for originating loans while saying, at the same time, that dealers SHOULD be compensated for originating loans. They also will NOT recommend “flat fees” because the potential for “disparate impact” discrimination still exists. They are an immense bureau with scary power and they have dealers, consumers, and lenders in a Catch 22.

  • avatar
    Crabspirits

    Hmmm, the motorists in the pic appear to be performing a “Smokey Red 22”.

    • 0 avatar
      racebeer

      Nice movie reference ….. +1 for you!

    • 0 avatar
      psychoboy

      indeed…they are not.

      That’s the beginning of the overland scene from Kurt Russell’s best movie ever…Used Cars.

      nice movie reference….wrong movie.

      the network edit of that scene is hilarious…since Deborah Harmon is braless under a thin blouse in the back of that truck.

      • 0 avatar
        Crabspirits

        I knew I had seen it before, and knew it wasn’t SATB, but this snippet appears nearly identical aside from the “FOXX HUNT” decal at the top of the windscreen.

        If one had never seen Used Cars, this could very well be the beginning of a Smokey Red 22…although I have never seen many instances of such happenings…I don’t know where I’m going with this..

  • avatar
    sirwired

    “Dealers have to discount rates to be competitive”.

    Huh-what!?!?!!? The whole bone the CPFB has to pick with the dealers is them varying the amount of MARKUP on the rate. And how similarly-situated borrowers of color seem to pay a higher markup than white people.

    Frankly, I trust NADA about as far as I can throw a copy of the Blue Book. These are the same guys that keep telling us that Tesla is the devil because car dealers are such paragons of customer service and somehow we need to be “protected” from a manufacturer selling cars on their own.

  • avatar
    dwford

    My experience in the car business was that the worse the credit, the LESS able to market up the rate the finance manager became, and the higher the loan origination fee to the dealer became – it could reach $3-4,000 in CT. It the decent and good credit customers where the banks allowed the 2-3% rate markups, which were often discounted in favor of packing the payment with warranties etc.

    • 0 avatar
      05lgt

      I’d be afraid this meant my pale skin, graying hair and educated vocabulary meant I’d been scammed, but it’s hard to imagine the loan originator offered a negative rate so the dealership could knock my rate up to 2.5%. The assertions that high rates are caused by bad negotiation are based on wish fulfillment. The assertions that skin color affects the rate are based on peer reviewed control group backed empirical data. Behavioral economics is a real science, and it can’t be wished away just because it means I got some advantages that weren’t fair.

      • 0 avatar
        darkwing

        So, I assume your commitment to scientific veracity means you don’t buy into any of that gender pay gap stuff, right?

        (And “control group backed”, huh? You’ll have to explain that one in context.)

        • 0 avatar
          S2k Chris

          Gender pay gap has been all but disproven.

          http://online.wsj.com/news/articles/SB10001424052702303532704579483752909957472

          “While the BLS reports that full-time female workers earned 81% of full-time males, that is very different than saying that women earned 81% of what men earned for doing the same jobs, while working the same hours, with the same level of risk, with the same educational background and the same years of continuous, uninterrupted work experience, and assuming no gender differences in family roles like child care. In a more comprehensive study that controlled for most of these relevant variables simultaneously—such as that from economists June and Dave O’Neill for the American Enterprise Institute in 2012—nearly all of the 23% raw gender pay gap cited by Mr. Obama can be attributed to factors other than discrimination. The O’Neills conclude that, “labor market discrimination is unlikely to account for more than 5% but may not be present at all.” “

        • 0 avatar
          psychoboy

          I’m guessing there is a loan processor that picks rates based on the names of the applicants.

          Constance Johnson gets a 4% loan, but her daughter Annasthaeyzsia gets one 4pts higher…everything else being equal.

          btw…I am not making those names up…
          http://newsok.com/campaign-worker-sues-u.s.-senate-candidate-constance-johnson/article/5348812

  • avatar
    dwford

    Every deal is different, but good finance managers will maximize the back end profit of each deal, sometimes that’s rate markup, sometimes it’s warranties. They usually had the discretion to cut the front end profit in favor of back end profit if the total gross was better

  • avatar
    Xeranar

    If anything this is a good example of what regulation can do to benefit citizens. In essence each actor was getting ‘free’ interest that was unearned by simply being in a business agreement to funnel action to them. It’s not inherently illegal but under new regulations it would be squashed and changing to a fee-based system would actually make the system more competitive, you know that thing that Conservatives and Capitalists crow about but never actually want.

  • avatar

    RE: “And that’s the real solution. Let car manufacturers sell directly to their consumers.”

    Why would auto manufacturers want to do that? They’d have to buy back all of their dealerships. They don’t have the money to do that or begin to finance their own inventory. The legacy OEMs already have learned they want no part of retailing cars. Their dealers are their partners.

    What is keeping auto OEMs from competing with their own dealers? Common sense.

  • avatar

    RE: “Those who fail to recognize or react to the situation they find themselves in will continue to perpetuate whichever stereotype applies. Where I come from, we call them sh!tbags.”

    Subprime/BHPH is how many improve their credit score to graduate back into the 4 “normal” credit tiers. Guido and Tony, at Kneecap Motors and Car Loans, don’t report to the credit bureau.

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