Billions of dollars at stake as dealers, Feds face off over auto loan regulations

"Dealers have to discount those rates to be competitive. The current system saves customers money. Period." – Forrest McConnell

Auto dealers and the federal government are facing off over proposed rules to regulate auto financing, and this week the head of the nation's largest dealer lobby came out strongly against plans to tighten lending practices and extend federal oversight.

"The government is trying to take away the consumer's right to get a discount," said Forrest McConnell, chairman of the National Automobile Dealers Association. Speaking at an Automotive Press Association event in Detroit, McConnell said dealers need the ability to "discount" interest rates for auto loans.

"Dealers have to discount those rates to be competitive," he said. "The current system saves customers money. Period."

The government disagrees.

The Consumer Financial Protection Bureau wants to extend its ability to regulate auto financing and argues a move to a flat fee system for auto loans – rather than discretionary interest rates – would benefit consumers and allow for more transparency in the process.
The CFPB says the current system places customers at risk for discrimination, as dealers could potentially mark up rates.

"[This] proposal would extend our oversight, allowing us to root out discrimination and ensure consumers are being treated fairly across this market," CFPB director Richard Cordray said in a statement.

"[This] proposal would extend our oversight, allowing us to root out discrimination and ensure consumers are being treated fairly across this market." – Richard Cordray

McConnell countered that dealers are against discrimination, and called the CFPB's position "flawed."

Billions of dollars hang in the balance, as the CFPB said there were 87.4 million outstanding auto loans worth nearly $900 billion as of the first quarter of 2014. Most auto financing is done through "nonbank" entities, like third-party loans arranged through a dealer with a finance company affiliated with an automaker, as opposed to a conventional bank. The bureau wants to extend its supervision to these nonbank entities.

The CFPB said about 38 auto finance companies would be subject to the new regulation and estimates they originate 90 percent of nonbank auto loans and leases. In 2013, they provided financing to about 6.8 million customers, the bureau said.

Dealers Under The Spotlight

In addition to financing practices, dealerships – and the manner in which they operate – have come into sharper focus in recent years as the economy has rebounded, resulting in increased auto sales. NADA estimates US new-car sales will hit 16.4 million this year and 16.8 million next year.

Additionally, century-old franchise laws have also come under fire as Tesla Motors has challenged rules that prohibit companies from selling cars directly consumers, resulting in notable legal battles across the nation.

"Personally, I think Tesla's a great car," McConnell said. "I don't have anything against Tesla. I think the franchise system is the way to go."

Tesla founder Elon Musk, stung by defeats in several states where his company challenged franchise laws, called the system a "perversion of democracy" at a 2013 shareholders meeting, and said "customers are going to lead a big revolt" on this front.

McConnell said the franchise system allows for more competition, as even dealerships that sell the same brands compete against each other for customers.

"Dealers are so busy competing with each other, it leaves no room for complacency," said McConnell, a Honda and Acura dealer from Montgomery, AL. "Competing with the dealer down the street and on the Internet benefits this nation."