On the recommendation of the National Automobile Dealers Association (NADA), the Federal Trade Commission (FTC) selected ADL authors Mike Charapp and Rob Cohen to participate as panelists in a roundtable discussion that was held on April 12, 2011 at Wayne State University Law School in Detroit. The roundtable discussions focused on consumer issues in motor vehicle finance and leasing contexts.
On March 9, the FTC announced their intention of conducting the roundtable discussions and issued a statement which included the following information:
[T]he Federal Trade Commission will host a series of roundtables around the country to gather information on consumers’ experiences when buying or leasing motor vehicles. The roundtables will explore consumer protection issues related to the sale, financing, and leasing of the consumer vehicles consumers most often use – cars, SUVs, and light trucks.
For many consumers, buying or leasing a car is their most expensive financial transaction aside from owning a home. With prices averaging more than $28,000 for a new vehicle and $14,000 for a used vehicle from a dealer, most consumers seek to lease or finance the purchase of a new or used car. Financing obtained at a dealership may provide benefits for many consumers, such as convenience, special manufacturer-sponsored programs, access to a variety of banks and financial entities, or access to credit otherwise unavailable to a buyer. Dealer-arranged financing, however, can be a complicated, opaque process and could potentially involve unfair or deceptive practices.”
The Detroit event consisted of six panel discussions. On each panel were industry experts presenting consumer, dealership, and finance company perspectives. The panel discussion topics were as follows:
1. Understanding the Motor Vehicle Sale, and Credit Transaction, From Both Prime and Subprime Perspectives
2. Interest Rates, Dealer Reserves, and Markups
3. Payment and Locator Devices and Consumer Privacy
4. Spot Delivery
5. Contract Add-Ons
6. Vehicle Title Problems and Dealer Bankruptcies
Rob Cohen participated on the “Contract Add-Ons” panel along with a consumer rights attorney and an Assistant Attorney General from Illinois. Mike Charapp was assigned to the panel on Spot Delivery along with an Assistant Attorney General from Iowa.
“My fellow panelists were quite fair-minded compared to some of the other consumer rights advocates who attended the meeting. When you hear some of these advocates speak, you get the impression that they would prefer that dealers not make any profit from the sale of vehicles,” says Cohen.
The FTC clearly has dealer practices on its radar screen and is looking for ways to exert its newly expanded and expedited rulemaking authority under the Dodd-Frank Act. Of most concern to dealers is the heavy focus on dealer participation (reserve) and spot delivery. Various consumer groups claim that these practices are abusive and result in consumers paying far more for financing than they have to.
“This is complete nonsense,” says Cohen. “The groups who claim that consumers pay more for financing as a result of dealer participation and spot delivery either don’t understand how dealer financing works or are making disingenuous arguments.” One such argument, says Cohen, is that dealer “markup” costs consumers billions of dollars each year. This argument was recently made in a report published by the Center for Responsible Lending (CRL) (see Under the Hood: Auto Loan Interest Rate Hikes Inflate Consumer Costs and Loan Losses, http://tinyurl.com/4ynpgol, April 19, 2011).
Cohen goes on to state that “the CRL’s entire argument is based upon the flawed assumption that consumers can obtain financing from the auto finance company at that company’s ‘buy rate.’ This is simply not the case. Dealers are the retail outlet for these finance companies. If these companies had to set up retail shops to attract consumers, you can rest assured that the interest rates they charged consumers would reflect the costs associated with these retail outlets. And, the resulting interest rates would most likely equal or even exceed the rates charged by dealers.”
“As for spot delivery, consumer groups seem to believe that dealers are somehow incentivized to deliver vehicles knowing that they will have to come back. Although there may be a few ‘bad eggs’ out there who may engage in questionable spot delivery practices, from my experience, the vast majority of dealers are highly motivated to ensure that a delivery stays delivered. The last thing dealers want to do is contact a customer and tell him/her that the financing fell through. This generates ill will and can be very costly to the dealership,” says Charapp.
The panel discussions were video-recorded and are available at http://tinyurl.com/3ogucvu.
Dealers should remain vigilant and continue to participate in the political process, particularly when asked to do so by the NADA. NADA will continue to urge the FTC not to impose burdensome and unnecessary regulations and is prepared to fight back in the event the FTC oversteps its authority.