DETROIT -- Replacing dealer-assisted financing with flat fee compensation, as advocated by the Consumer Financial Protection Bureau, poses “a huge threat to the consumer,” the head of the National Automobile Dealers Association warned again today.
David Westcott, NADA chairman, says dealers are “price discounters” and eliminating their ability to negotiate a finance rate for buyers could increase the cost of consumer loans.
Dealers are exempt from CFPB oversight but the federal bureau is putting pressure on finance companies to change how they compensate dealers for arranging auto financing for consumers.
Westcott says NADA has been working with the Congressional House Financial Services Committee to get the bureau to explain its rationale.
“But so far the CFPB has refused to do so,” Westcott told journalists today during a presentation before the Automotive Press Association in Detroit.
At issue is the practice referred to as “dealer markup.”
Under the practice, lenders allow dealers to adjust the interest rate lenders charge consumers and pocket the difference.
Consumer groups argue that the practice gives dealers an incentive to prod some buyers, especially women and minorities, into pricier loans.
Dealers say they earn the markup for their services, which include arranging financing and handling paperwork, and that buyers can negotiate the spread.
Automotive News reported this month that lenders have sent dealerships letters warning that pricing variations among legally protected classes such as minorities and women could put them at risk for charges of discrimination.
Without answers from the CFPB “there is no way to know whether there may be unintentional discrimination in the auto lending market, as the CFPB, claims,” Westcott said.
In other comments, Westcott:
- Said the impasse in Washington over the federal budget and debt ceiling is affecting the U.S. auto industry “in a consumer confidence way.” During a period of uncertainty, whether before an election or because of rising gas prices, there is a dip in sales, Westcott said.
- He said traffic at his Buick-GMC dealership in Burlington, N.C., has been down for between the last 30 or 40 days. Some of the decline reflects consumer anxiety over household finances and some a lack of inventory, he said.
- Defended the franchise dealership system. He said the system creates competition and the U.S. consumer is the primary beneficiary.
- Praised Tesla Motors for producing a “great car” but said he disagrees with its direct-selling distribution system that bypasses the franchise dealer network. He says that it should be up to individual states to decide. He also says he would “absolutely” like to have a Tesla franchise if it were offered. “It’s a great car,” he added.
- Warned Chinese automakers also pose a threat to the U.S. auto industry’s dealer franchise system by following Tesla in selling directly to customers, Bloomberg reported.
“It’s in the back of everybody’s minds at this point, just to make sure that we should talk to the Chinese as their cars evolve,” he said. “Dealers won’t fight having those cars come in. Will we fight to make sure there’s a franchise system? Yes.”
Bloomberg contributed to this report