Today alone, tens of thousands of American consumers will purchase a new car or truck, and the overwhelming majority of consumers who finance their purchase will take advantage of optional financing offered through a dealership.
Consumers benefit when they finance through dealerships. An individual consumer might be able to track down four or five interest rate quotes in a day by going to local banks or credit unions. But dealers can shop a customer’s credit application to dozens of lenders instantly — and this usually results in dealerships offering customers lower rates than they can obtain on their own.
Dealers can also discount rates for their customers. Because dealers are compensated by lenders for arranging credit, dealers can cut their own compensation to reduce a customer’s rate to meet or beat a competing offer.
Dealer discounts are a good deal for everyone — consumers get great rates, and dealers are able to earn their business.
But the Consumer Financial Protection Bureau (CFPB) has been trying to eliminate dealer discounts, because it alleges that discounts create a fair credit risk.
The CFPB has sought, through “guidance,” to make it impossible for dealers to discount interest rates for their customers, even for customers facing serious budget constraints.
The main problem with the CFPB’s policy is that, while well intentioned, it will reduce competition and raise credit costs, thereby hurting the very consumers it is trying to help. According to a Wall Street Journal analysis, a recent CFPB settlement could cost some customers $586 in higher credit costs. By eliminating discounts, everyone would be put at risk of paying more by eliminating this competitive force from the marketplace.
Equally troubling is that the CFPB initiated this policy behind closed doors, without any transparency or input from the public. For more than a year, the CFPB would not even release the methodology backing up its policy despite repeated bipartisan requests from members of Congress. And, once disclosed, its methodology was thoroughly discredited in a major peer review study.
This week the House will consider a bill (H.R. 1737), that would rescind the CFPB’s flawed auto finance “guidance,” and require transparency and public participation before issuing new guidance. The bill also directs the CFPB to study the consumer impact of eliminating a car buyer’s ability to get a discount in the showroom. The CFPB has admitted to Congress that it failed to undertake this fundamental analysis before issuing the flawed guidance.
Most importantly, there’s a better way to ensure fair credit while keeping credit affordable and accessible.
The National Automobile Dealers Association (NADA), the National Association of Minority Automobile Dealers and the American International Automobile Dealers Association issued a compliance program for their members, based on a fair credit program that the Department of Justice developed for dealers in 2007. The compliance program ensures that when dealers discount rates, it is for legitimate business reasons that have nothing to do with the buyer’s background. Many dealerships have adopted this program, and numerous well-respected compliance attorneys who have reviewed this optional approach are very supportive of it.
Unfortunately, the CFPB won’t accept this common-sense solution.
Discrimination is wrong, period. And fair credit is critical for consumers everywhere. But so is their ability to get the most competitive rates out there for their cars and trucks. H.R. 1737 and the automobile compliance program would ensure fair access to credit for everyone, while preserving a consumer’s ability to get discounted interest rates and competitive credit.
NADA urges members of Congress to vote yes on H.R. 1737.
Welch is president of the National Automobile Dealers Association.