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Keep Automotive Retailing & Financing Competitive for Car Buyers

07-Oct-2014

In an annual speech to the Automotive Press Association, NADA offered a solution to address the CFPB's fair credit concerns while preserving the robust competition for car buyers in indirect auto lending.
 
Competition in automotive retailing is the cornerstone of the franchised new-car dealer network, which benefits both car buyers and automakers, said NADA Chairman Forrest McConnell. “Competing with the dealer down the street or on the Internet benefits car buyers across the nation,” McConnell said today in remarks to the Automotive Press Association in Detroit. Dealers compete fiercely against each other on vehicle pricing, financing and service which reduces costs for consumers, he said.
 
As a percentage of total sales in the new-car, used-car and service/parts departments, net pretax profit at new-car dealerships was just 2.2 percent in 2013. “Our manufacturers benefit from a high return on capital in making vehicles, as opposed to the low margin of selling them, because dealers bear the cost and risks of these investments—at virtually no cost to the manufacturer,” he said.
 
McConnell, a Honda/Acura dealer from Montgomery, Ala., said there's a simple reason why manufacturers use dealers to sell new cars. “The franchised dealer network is the most competitive, the most cost-effective and most pro-consumer model for buying and selling new cars and trucks,” he said. “If manufacturers sold directly to customers, there would be zero competition in pricing vehicles, parts and service. Car buyers would be stuck paying the full sticker price—because there would be no ‘same brand dealership' to shop and compare prices.”
 
McConnell added that dealer-assisted financing, which is optional, increases competition for car buyers, and the retail finance rate offered by dealers is often more competitive than a bank or credit union. “We work with multiple lenders who compete for the dealers' business by offering us low financing rates,” he said. “The bottom line is this: dealer-assisted financing provides car buyers with the ability to get a discounted auto rate from the dealer. And low rates mean lower car payments for our customers. But the government is trying to take away a customer's right to get that discount.”
 
The controversy with the CFPB has been ongoing since March 2013 when the agency issued its ‘guidance’ on indirect auto lending, which took the wrong direction by attempting to eliminate the flexibility of dealers to discount financing rates offered to their customers by pressuring lenders to switch to a flat fee compensation system.
 
“We can all agree on one thing: we are all against discrimination. There's no room for it in this business or any other business. But what we can't agree on is the CFPB's insistence on a flat fee model—which eliminates a customer's right to get a discount,” McConnell said. “Right now, dealers are incentivized to select the lender that offers us the lowest available rate. The current system works because it forces banks to compete and offer dealers low rates to get their business. Next, dealers have to discount those rates to beat the competition or meet a customer's budget. Those two competitive factors drive rates lower for our customers.
 
“What happens to customers if the current system changes to flat fees,” McConnell asked? “Lenders will want to pay higher flats to get business. Not lower interest rates. That would give dealers the incentive to select the lender that offers the highest flat fee.” That doesn't help car buyers save money, he added.
 
Last January, NADA developed an optional Fair Credit Compliance Policy and Program for dealerships, which was released in partnership with the National Association of Minority Automobile Dealers and the American International Automobile Dealers Association. “We've come up with a solution to address all the risks the CFPB talks about—a dealer following the program sets a standard starting point for dealer reserve,” McConnell said. “This gives a dealer who adopts the program the ability to discount the finance rate when there is a legitimate business reason—like helping a customer fit a monthly payment plan into his or her budget.”
 
Since March 2013, the industry—from dealers to lenders—and Congress have worked to bring greater transparency and accountability to the CFPB. “There haven't been many issues lately where members of Congress have seen eye to eye,” he added. “But the CFPB's flawed position is one of them.” Last month, Reps. Ed Perlmutter (D-Colo.) and Marlin Stutzman (R-Ind.) introduced H.R. 5403, a bipartisan bill to nullify the CFPB's auto lending ‘guidance.’ So far, 69 Republicans and 40 Democrats in the U.S. House of Representatives support the dealer's ability to discount the rate for our customers, he said.
Source: NADA Public Affairs

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