Having worked as a market research specialist in a previous life, I know a thing or two about putting together market reports. So I feel safe in saying that the people at the Center for Responsible Lending (CRL) weren’t very responsible with a report they issued on dealer markups.
When I prepared reports for our overseas headquarters, it was important that my boss tell me what conclusion my data was supposed to support. Hey, I needed to know how he wanted me to “cook” the numbers.
Well, it’s obvious to me what conclusion the CRL wanted its study to support, which wouldn’t be bad thing if it wasn’t being used to guide public policy. See, the Federal Trade Commission will soon assume new rulemaking powers, and the CRL rolled out its study at the agency’s public roundtable in Detroit last month. From what I hear, industry representatives in attendance shot it down pretty quickly, but still.
Titled “Under the Hood: Auto Loan Interest Rates Hike Inflate Consumer Costs and Loan Losses,” the report’s main finding was that consumers who financed a car through a dealership in 2009 allegedly paid more than $25.8 billion in extra interest over the life of their loans, an increase of 24 percent from 2007. Quoting CNW Research, the study points out that the average markup was $714 per consumer, and the average rate markup was 2.47 percentage points.
I guess it’s difficult for me to believe that an extra $19.83 a month (I’m basing that on a 36-month term) increased the odds of a subprime borrower defaulting by 12 percent or made it 33 percent more likely that his or her vehicle would be repossessed.
The CRL report also alleges that dealers use certain borrower and loan characteristics as a way to target customers for increased rate markups. The most vulnerable, the report says, are customers with weaker credit, loans with longer maturities, loans for used cars and loans where smaller amounts are financed.
I just wonder if the CRL considered the risk associated with originating such loans, and the impact defaults and delinquencies have on both dealers and lenders.
Then there’s the graph the nonpartisan research and policy organization sources from the American Bankers Association. It shows that the indirect channel far outpaced direct-to-consumer financing in terms of repossessions per 1,000 loans between July 2009 and June 2010. It completes its points with the following:
“Dealers have asserted that the rise in auto repossessions … is mainly caused by larger economic factors outside the dealership’s control. But given that direct and indirect lenders operate in the same macroeconomic environment, this argument does not entirely explain why repossession rates for dealer financing have been nearly double the rates of direct auto lending in recent history.”
Come on, right? I mean, did the CRL even consider how deep most direct lenders were willing to go during that period?
The CRL then says consumers are at a disadvantage because dealers aren’t legally bound to disclose their markups. Now, Tom Hudson, our legal columnist, pointed out to me that the Federal Reserve Board has twice shot down assertions that dealer markups should be a required disclosure under Regulation Z. The report fails to mention that fact. Big surprise.
More importantly, the report makes clear that the CRL doesn’t grasp what rate F&I managers are marking up. It’s not the buy rate; it’s the wholesale rate. And let’s not forget that the retail installment sales contract discloses that the APR is negotiable and that the dealership “may assign the contract and retain its right to receive a part of the finance charge.”
The CRL’s researchers also don’t seem to understand the work that goes into handling subprime customers. If they did, they would understand why dealers charge for the services their F&I offices provide. There are stips to collect, as well as acquisition fees and state usury caps with which to contend.
And one more thing, I don’t think there’s an F&I manager out there who wouldn’t prefer to earn his or her commission on F&I product sales rather than finance reserve. If you find one, CRL, let me know.
Listen, I agree that we need to figure out how to make the car-buying process more transparent to consumers. But to do that, consumer advocates need to stop portraying consumers as victims while vilifying dealers. It’s an easy way out, it’s been going on too long in too many venues, and all it’s resulted in are disclosures that consumers can’t understand.
