Column: American Action Forum says cost-benefit ratio of proposed car dealer rules closer than FTC projects

An American Action Forum analysis of information the Federal Trade Commission is using to justify its plan for new car dealership rules indicates a cost-benefit ratio "potentially closer to even, if not on the net-cost side" — not the overwhelming benefit the agency cites.

The Sept. 1 report by Dan Goldbeck, senior regulatory policy analyst for the center-right think tank, draws upon the 2020 Cox Automotive Car Buyer Journey cited by the FTC in its regulation proposal.

The Cox study found customers spend 15 hours researching, shopping and buying a car. The transparency the FTC has planned to introduce would cut 20 percent from that total, the agency contends. It estimates those three hours would be worth $66.60, based on a valuation consumers put on their time spent away from work.

Using a conservative extrapolation of how quickly the new regulations would take effect, the FTC calculates society as a whole would realize a $31.08 billion benefit between 2022 and 2032.

Goldbeck said the same Cox study estimated customers spent two hours and 50 minutes at a physical dealership, depending on vehicle. He argues the FTC regulations would only materially affect what Cox estimated to be 32 minutes negotiating a price, for "all other aspects of this estimated 'visit' are rote aspects of the process that largely fall outside the scope of the new requirements."

If the FTC's rules knock 30 minutes off the negotiation time, society would only recoup $5.2 billion over the decade, he said.

Cox's two-hour, 50-minute figure included 48 minutes looking at vehicles and talking to sales personnel at the dealership where the transaction occurred. The study also found shoppers spent one hour and 49 minutes visiting other sellers and nine hours and 29 minutes researching and shopping online. According to the FTC, some of this time might be saved by the transparency the agency has proposed.

"The Commission assumes that, as a result of the proposed rule provisions prohibiting misrepresentations and requiring price transparency, each consumer who ends up purchasing a vehicle will spend 3 fewer hours shopping online, corresponding with dealerships, visiting dealer locations, and negotiating with dealer employees per motor vehicle transaction," the FTC wrote.

The FTC expects its new rules will lengthen paperwork at the dealership. The agency estimates retailers will spend two minutes of time — representing a $21.84 expense — and 11 cents in materials on any of the three major disclosures its regulations propose.

Under the FTC's plan, every dealership must tell a customer the cost of buying a vehicle for cash without any aftermarket accessories or F&I products. The customer must decline this offer in writing before moving to the financing or F&I product stage of the transaction. If the customer wants to arrange financing, the dealership must provide total cost of financing the vehicle to term, again, without add-ons. If a borrower wants to buy F&I products or accessories for a financed vehicle, they must first also decline that core financed-vehicle price in writing. The dealership may now sell add-ons to the cash or finance buyer, so long as they provide a final disclosure itemizing the vehicle and those additional products.

This could mean three new, separate pieces of documentation for some dealerships, depending on the transaction. But the FTC's cost-benefit analysis only factors in the cost of a single disclosure per deal, Goldbeck said. The agency estimates this single disclosure would find dealerships spending $850.5 million over a decade to be compliant.

Goldbeck pointed out that according to the Cox research, new-vehicle buyers visit 2.2 dealerships on average while used-vehicle buyers travel to 2.4 retailers. He argued that this means two disclosures generated at a minimum — one per dealership — bringing the total to $1.7 billion over a decade.

"If one merely assumes that there are, say, three 'disclosure points' at each of these two dealership visits to yield a six-fold increase in add-on disclosure costs, that would bring total costs of $5.1 billion," he wrote. "If one simply adds on the roughly $510 million for all other cost subsections as they currently stand per FTC's estimation, then the proposal's total costs would exceed its benefits under the half-hour savings scenario discussed earlier."

Of course, Goldbeck's theory presumes a customer selects a car, arranges financing, picks out F&I products but walks away from the transaction at one dealership before going through the process all over again at a second dealership. In addition, not all deals are financed, nor do F&I professionals always succeed in selling coverage.

According to Experian data cited by the FTC, 81 percent of new models and 35 percent of used vehicles are financed. However, National Automobile Dealers Association figures say F&I penetration — a reference to arranging financing, selling an F&I contract or both — spans 94 percent of new vehicles and 86 percent of used ones.

It seems likely a customer will experience at least two or three "disclosure points," but it's unclear if they'd have all six indicated in Goldbeck's scenario. At five disclosures or fewer, the benefits of the regulation still outweigh the cost — even if the customer only saves the 30 minutes Goldbeck proposes. On the other hand, these and other disclosures have the potential to add time back to the transaction and nibble away at that benefit, something Goldbeck also notes.

"This additional material could confuse consumers and drive additional questions and increased transaction times," he wrote.