CFPB: The Auto Industry Pushes Back

In the last issue, we reported on the attack by the Consumer Financial Protection Bureau on dealer participation in financing. Based on the bulletin from the CFPB to large lenders, many experts and industry critics have declared that dealer reserve is dead and that flat fees are imminent. But the motor vehicle dealer industry is pushing back. The National Automobile Dealers Association is leading a multi-front offensive to protect the dealer reserve system. It is engaged in action on regulatory, legislative, and public relations fronts. It is working with finance sources and other interested parties to make the case for the dealer reserve system. The actions are having a positive effect.

On May 28, 2013, thirteen Democratic representatives on the U.S. House Financial Services Committee delivered a letter to the CFPB asking for explanations of the agency’s actions. On June 20, 2013, 35 Republican House members delivered a letter to the agency raising similar issues.  Both letters questioned the basis of the CFPB’s contention that dealership lending policies have led to “uninten-tional discrimination” and raised concerns about the impact of the agency’s initiatives on the availability of affordable credit for motor vehicle buyers.

There are many reasons why these representatives, and many others, are concerned about the actions of the CFPB. The CFPB’s legal basis is highly questionable. A revision of the way an entire industry has operated for decades should take place through a regulatory process that allows for comments from all affected parties. It should not proceed on the basis of CFPB threats to the finance sources that buy paper from dealers (over which the CFPB has no direct regulatory authority).

The finance reserve process in dealerships is a tried and true system honed over the decades. Controls by finance sources implemented over the years have tightly constricted the reserve amounts that dealers may earn. As a result, the system works for the benefit of consumers for whom dealer employees are incentivized to fight for the best terms of credit; of dealers for whom the income can be used to pay personnel to work to achieve better credit results for customers; of manufacturers who will sell more cars as a result of the ability of dealers to obtain more credit for consumers; and of the public at large because of the increased economic activity.

What happens if the CFPB is successful in ending the reserve system and imposing flat rate fees by regulatory fiat? No one can anticipate all unintended consequences; and that’s the problem. Taking a regulatory ax to a tried and true system is likely to create serious problems. Business logic suggests that fewer cars will be sold as less credit is available and that credit will cost consumers more as dealer employees are incentivized to offer the deal that pays them the highest flat fee rather than the deal that allows them to offer the lowest rates to customers. Even more concerning is that the change may constrict the availability of affordable credit to those credit-impaired consumers who need it most.

To paraphrase Mark Twain, the reports of the death of finance reserve are greatly exaggerated. The industry is pushing back. Stay tuned for more developments.