DETROIT – When you hear the word “abusive” used so many times within the context of auto finance, it jolts you to attention.
And that was my reaction as I sat on a panel yesterday during a day-long symposium here on “The Road Ahead” for auto finance regulation sponsored by the Federal Trade Commission.
“Abusive” was the word John Van Alst, an attorney at the National Consumer Law Center, used over and over during our panel. He was countered by Thomas B. Hudson, partner, Hudson Cook LLP, and Thomas A. Moore Jr., president and CEO of First Investors Financial Services, who argued that practices in auto finance are sound and fair. Essentially, the debate came down to how much do consumers understand about the auto financing process and to what degree are dealers giving borrowers a raw deal.
A deep lack of understanding pervades this debate, and FTC officials will admit — both publicly and privately — that they do not yet know enough about auto finance to determine whether additional regulations are needed. Industry officials maintain that the vast majority of auto finance transactions are wholesome and that the overwhelming number of consumers have full understanding of the financing transaction to which they are committing. Meanwhile, consumer advocates like Van Alst and Chris Kukla, senior counsel for government affairs at the Center for Responsible Lending and another co-panelist, claim the exact opposite. Kukla, for example, cites studies that suggest the vast percentage of consumers do not understand their financial deals. (Preliminary data from our study on the matter suggests otherwise.)
To be sure, the FTC will act based on which side is correct — although I suspect that the FTC will never be able to fully parse out which side is “right.” In some ways, the roundtable yesterday was good. It allowed Moore, Hudson and others from the industry to speak out, and to directly counter some of the “abuse” claims of advocates. A one-sided “debate” would have been much worse for auto finance, of that I am certain.
If the information is NOT disclosed, there is no chance of the consumer understanding the terms of the deal for them to make an informed decision. On a loan that has a 20% discount fee, I do not understand the logic of not disclosing the amount to the consumer. If that is not important, why disclose APR?
Let me refine my point. It would not be bad to expand the disclosures, so in that sense I agree with Frank. It is not going to be possible to do everything. I do not think that the FTC will take on, say, five different initiatives on this matter. You’re going to get one or two — so which should it be? And in that context, I don’t think disclosure will do much good. I’d choose other initiatives.
So now that we agree that something needs to be done – who will provide the leadership?
Any bankers want to lead so that they can take one step to start to restore “trust”?
It sounds to me as though there are increased calls for simplicity, not transparency. The two can be mutually exclusive. Obtaining a car loan is a tremendously complex process. It’s probably more complicated than it needs to be, but that’s for another post. Sitting a borrower down and explaining the intricacies of obtaining a car loan would make anyone’s eyes glaze over.
I agree that everyone needs to be more forthcoming, but the information — both the quantity and quality — needs to be provided in context. I remember leasing a new car and the process taking three hours and involved me sitting at three different desks.
The auto lending process needs to be simplified, not transparified (yes I know that’s not a word. But it probably should be).