‘Forced financing' ban clears Texas Senate

Texas state senators have overwhelmingly approved a bill barring auto dealerships from penalizing or denying shoppers seeking to buy vehicles with cash or financing arranged outside the store.

Should Senate Bill 1464 pass the House and be signed into law, it could be the first restriction on such "forced financing" nationwide, according to a Texas Senate analysis released in late March.

SB 1464 would forbid an auto dealership from requiring consumers to use financing from the retailer or its partner lenders, transactions that generate finance-and-insurance revenue for dealerships. The bill would also prohibit dealerships from charging more to customers who bring cash or outside financing to a deal.

A dealership also "may not make a false or misleading representation that is inconsistent with this section," the bill's language says.

If signed into law, the bill would take effect Sept. 1; it would not affect deals executed before then.

A random Texas Automobile Dealers Association sample of retailers found 70 percent of car loans and leases involved dealerships' partner lenders, while the remaining 30 percent involved outside financing or buyers paying cash, according to association CEO of Legislative Affairs Rob Braziel.

The Texas Office of Consumer Credit Commissioner has received 121 complaints about forced financing between August 2021 and February 2023, according to state Sen. Royce West, D-Dallas, the bill's primary author.

"Members, this is a statewide problem," West, D-Dallas, told the Senate Business and Commerce Committee on March 30.

The bill's supporters include the Texas Bankers Association, the Independent Bankers Association of Texas and the Credit Union Coalition of Texas as well as individual credit unions.

"We understood it during the [vehicle] shortage," Texas People Federal Credit Union CEO Stuart Himmelstein told the committee, but he said forced financing has continued.

"It's growing and growing every day," he said.

Braziel also testified on the legislation before the Senate Business and Commerce Committee on March 30. At the time, the Texas Automobile Dealers Association took no formal position on the bill "since we were trying to work with the author on some other concepts and language," Braziel wrote in an email April 27. "That has not come to pass ... but we continue to work through the legislative process to address our concerns."

The Texas Automobile Dealers Association does not support the version of SB 1464 that passed the Senate, Braziel confirmed April 27.

Braziel told senators in March that a dealership might refuse a customer's funding source because of an issue with that lender. Some lenders are slow to pay the dealer — or never end up sending the funds, he said.

Unlike Himmelstein, Braziel said forced financing is on the decline.

"As inventory has normalized, we're not seeing those things in the marketplace today," he said.

Sen. José Menéndez, D-San Antonio, called it frustrating that forced financing existed given lawmakers have been "extremely supportive" of car dealerships.

"I'm sure most of your members don't do this, but we always have to legislate for those few bad apples, it seems like," he said.

SB 1464 passed 26-4 on April 12. It now sits before the state House Business and Industry Committee.

"I think it has legs," West told Automotive News on April 27. He said Texas was a "business state," but opposition existed to the idea of a business tipping the scales in its favor.

West said he'd even heard from auto dealerships who told them "these kinds of practices are unconscionable."

At least one other state capital has seen legislation related to forced financing this session. Massachusetts House Bill 297 is less extensive than the Texas measure; it would simply outlaw dealer mandates that customers use in-house financing.

That measure was sent to a Massachusetts Legislature joint committee in mid-February but has seen no activity.