The vitality of today’s auto industry was on full display throughout the convention center hallways at the National Automobile Dealers Association meeting in New Orleans this weekend. But all the happy faces didn’t stop the group’s outgoing Chairman David Westcott from beating the continued warning drums over what increased government scrutiny of auto lending could mean for the $783 billion business.
Westcott told participants that NADA will continue to defend in-dealership financing in light of threats to the system posed by Consumer Financial Protection Bureau actions. Westcott also told the group that NADA had developed a new set of specific guidelines to help dealers comply more carefully with fair credit laws.
Calling a flat-fee dealer compensation system harmful to consumers, Westcott argued that consumers need to be able to see if dealers can meet or beat offers from their banks. He said the action by the government could upend the market. Westcott rallied his troops, saying dealers should continue to engage local representatives in the nation’s capital on the issue.
But he also implored the federal agency to be more forthcoming and transparent with specific allegations and guidance. “If a federal agency is making allegations that discrimination exists in our industry, it should have to explain itself,” Westcott told the group.
Meanwhile, NADA clearly sees the clouds on the horizon and is making concerted efforts to prep dealers with its own sets of new compliance guidance. The organization sent out a new template on Friday called the “Fair Compliance Program.” The organization will lead a special workshop on the new guidelines Monday.
During Westcott’s speech, absent naming names, he said a nearly-$100 million fine “on one of our finance partners” was a “strong-armed consent order.”
Westcott told the audience that “CFPB believes the way to fix the problem is to eliminate a customer’s right to negotiate the APR with us,” and that “with that APR comes a fixed amount of compensation.”
But he said it would be consumers who suffer most in a flat-fee system since it would essentially kill ompetition. Westcott said those at the bottom of the credit ladder would be most severely impacted.
The solution to the participating or flat fee problem is to have a means to continue to allow these fees, but shift the method of how their included in each deal. It’s hard to explain in this short article, so contact me and I will demo a method my company has devised.
Mr. Westcott is spot-on. Here is what nobody wants to say that I (as an independent consultant) can.
1. The CFPB alleges discrimination yet does not share their statistical data (aka CFPB “black box”) on how they arrived at their conclusion. They only tell you they used statistical proxies. Might the disparity among APRs among whites and non-whites be correlated to other factors other than racism? A simple regression analysis might reveal what factors govern buy rate mark-up the most among various classes. Like reported in the WSJ…all dealers must all be racists and firms like Ally are responsible.
2. I attended the CFPB Auto Finance forum on Nov 14 2013. To quote CFPB’s Patrice Ficklin; “our analysis found a variance between whites and non-whites of 10bp…20bp…and even 30bp in some cases”. I about fell out of my chair. A 30bp variance in APR equates to $115-$200 variance in finance charge over the entire life of the typical 60-month $20k auto loan (based on a typical range in today’s rates). I might feel empathetic if the variance was say, 300 or 500 basis points. But 10bp to 30bp? Hardly a case for discrimination.
3. Industry fact: Dealers are willing to make an honest profit from any class. Protected or not. And they do. And dealers obtain a wholesale rate and set a retail rate. This is the foundation of capitalism.
4. Why would large financial institutions “lay down” to fines and not put up a legal fight to force open the “black box”? What happened to innocent until proven guilty? Would it cost more than $98 million to fight it? Maybe – the consent reached from the 2006 Ford/Chrysler/GMAC/NMAC/Toyota Consumer Finance Discrimination Litigation outlined a future tolerance test of 29bp.
5. The CFPB is focused upon disparate treatment/impact of protected classes since that is what ECOA is all about. I understand that and believe the law should be upheld and enforced. But the CFPB pledges to protect all consumers from UDAAP & other laws like ECOA. What is the CFPB doing to protect say, the low information white auto finance customer? It seems to me the CFPB’s approach in and of itself is discriminatory.