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But time savings, significant as they are, are only one small fraction of the ways consumers would save money with this rule. Dealers would not be able to sell worthless add-on products or deceive consumers into buying them. If the FTC’s cases against Passport and Napleton are any indicator, the cost savings here will well exceed the $30 billion estimate. Napleton alone allegedly charged over $70 million in deceptive and unauthorized add-on’s. With over 45,000 dealers in the U.S. generating hundreds of thousands of complaints to government regulators, it is safe to assume that Napleton and Passport are not simply “bad apples.” Implementing safeguards to help prevent these and other deplorable practices will only put more money back in consumers’ pockets, stimulate competition, and make the process of buying a car slightly less painful.

Enter the lobbying powerhouse NADA, smelling blood in the water for dealers’ substantial profits, and predictably dipping into its well-funded coffers to generate a fearmongering survey and report about the FTC’s rule. Before asking a single question, the survey spends three pages striking fear in the hearts of dealers about expanded liability, exposure to significant monetary penalties, and “increase[d] consumer confusion and frustration.” It is no surprise that this “representative sample” of 40 dealers (out of “roughly 60,” handpicked by NADA) who managed to fully complete the survey (and “nearly fifteen” who were interviewed) want us to believe that the rule will cost consumers more than it saves. This simply is not true.

Perhaps it’s time we asked the people who rely on and pay increasingly high amounts for cars what they would like to see. Thousands of consumers responded to the FTC’s rulemaking, sharing horror stories and pleading for its passage. The least we can give them is a measly 3 hours and $30 billion back.

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A large majority of American consumers rely on their car to get to work, school, healthcare, and other economic necessities. But buying a car is a painful process for consumers that generates tens of thousands of complaints to federal, state and local consumer protection agencies.

“The FTC’s rule would bring welcome clarity and relief to the vast majority of Americans who want to buy a car without being taken advantage of by dishonest auto dealers,” said Erin Witte, Director of Consumer Protection for CFA. “We applaud Senator Markey, Representative Jayapal, and each Senator and Representative who signed this letter to show the FTC that it has support in Congress for a rule that will save consumers real time and money.”

The FTC used its statutory authority to publish a notice of proposed rulemaking last year which addresses some of the most common abuses in the sale and financing of motor vehicles. The rule accounts for the marketplace reality that it is far too difficult and time consuming to learn what price a dealer will accept for a vehicle.

“A lack of transparency in auto financing obscures the true cost of a car and invites discrimination by unscrupulous auto dealers,” said John Van Alst, senior attorney at the National Consumer Law Center. “The FTC’s rulemaking seeks to address bait and switch pricing and the all too often lack of information about pricing altogether by requiring dealers to provide clear, upfront pricing for all buyers.”

Consumers have long complained that dealers unfairly tack on fees and charges that were not disclosed earlier in the process or which pay for useless and worthless add-on products and services. The FTC seeks to bring fairness to the marketplace by leveling the playing field and ensuring that dishonest dealers do not steal competition from honest dealers with this “bait and switch” conduct.

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Contact: Erin Witte, 202-596-9807

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CFA President White has announced the formation of a Transition Committee made up of representatives of CFA’s Board, Executive Committee and staff.  “We are pleased that Jack will remain as CEO during the search for a replacement,” said White.

“During his long tenure at CFA Jack has not only been CFA’s main conduit between the organization and the media, but over the years he has led CFA’s efforts in child and product safety, indoor air quality, consumer education, auto sales practices and, most significantly, auto safety.  As a well-known consumer advocate, Gillis is author, co-author and editor of 75 consumer books including The Car Book, published for 40 consecutive years.  He served for ten years as a contributing consumer correspondent for NBC’s Today Show representing CFA, was Good Housekeeping’s personal finance columnist, and was a child product safety columnist at Child Magazine,” said White.

“Gillis’ advocacy has been responsible for major changes in the automobile industry, including significantly improved vehicle safety, better warranties, and increased fuel efficiency.  Early in his career, The New York Times featured Gillis as a leader in a new breed of consumer advocates.  He was an adjunct professor at The George Washington University, where he taught in the Graduate School of Government and Business Administration, and he currently serves on the boards of the Center for Auto Safety (chair), Advocates for Highway and Auto Safety, Center for the Study of Services (Consumers’ Checkbook) and CAPA.  Previously, he was Executive Director of the Certified Automotive Parts Association, a non-profit standard setting organization.  He received his MBA from The George Washington University where he served as a Teaching Fellow and his BA from the University of Notre Dame,” added White.

“Serving the Consumer Federation of America for all of these years has truly been an honor.  It has enabled me to work closely with some of America’s greatest consumer and safety advocates, men and women who have truly changed America for the better.  Any success that I’ve had at CFA rests squarely on the shoulders of these remarkable activists.  As it enters its 54^th year, CFA has a very exciting future ahead and I will always cherish being a small part of its distinguished history,” said Jack Gillis.

Contact: Marceline White, marceline@marylandconsumers.org

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Vehicle inventory is down by about 30 percent which means car dealers have little incentive to negotiate.  “The rule of thumb that nobody pays ‘sticker price’ for a new car has fallen by the wayside as dealers stick to the manufacturers suggest retail price (MSRP) on the vehicle label,” said Gillis.  In fact, for some particularly popular vehicles in short supply, dealers are charging prices above sticker price.

Gillis’s advice on the best way to deal with this reality: “If you don’t need to replace your car right now, you should wait.”  The widely reported computer chip shortage and other repercussions from the pandemic are expected to ease up by the end of the year or early 2022. “By waiting, you’ll have more electric vehicles to choose from, as well as the 2022 models with the latest safety features,” said Gillis.

Unfortunately, there are many Americans who don’t have the luxury of holding off, and need to replace or buy a new vehicle right now.  If you find yourself in this predicament, CFA and Gillis are providing the following tips on coping with today’s market challenges.

Ten Tips on Saving in a Seller’s Car Market

1. Shop carefully. You can find some deals and incentives, especially on the less popular vehicles.  Everybody is looking for SUVs, but if a sedan meets your needs, you can find some good prices.
2. Shop around online. As car buyers become more comfortable with online vehicle purchases, more and more dealers are offering internet specials.  Shop carefully and read the fine print, but these offers can be good negotiating tools when you’re in the showroom.
3. Widen your search process.  If buying from a dealer 70-100 miles away will save you money, consider it. You can still take your car to your local dealer for service and warranty work.
4. Avoid the upgrades. Unfortunately, most manufacturers don’t let you pick and choose your options, you must buy them in packages. Skipping the fancy packages on a particular model can save you 10-20 percent.
5. Skip the extras.  Dealer add-ons are budget busters.  Floor mats, cargo containers, luggage racks and fabric treatments, if needed, can always be purchased later and at far less cost.
6. Decline the extended warranty.  Today’s new car warranties are very good and extended service contracts (they’re not really warranties) are not only expensive, but if they actually paid off for most people, they wouldn’t be such big profit centers.  Instead, plunk those service contract dollars in a special savings account to draw on if you need post-warranty repairs. Most likely, you can use this account to build up your down payment for your next vehicle.
7. Beware of using longer loans to reduce your monthly payments. While those smaller payments may sound attractive, you will pay significantly more in overall interest costs, and you’ll probably be “upside down” for the first year or two. That means if the car is totaled or you must sell it, you’ll have to make up the difference between your insurance payment (or sale) and the balance on your loan.
8. Shop around for financing. Interest charges are one of the most expensive aspects of car ownership. Knocking a point off the interest rate by shopping around will save you hundreds and lower your monthly payments.  Check with your credit union or bank to see what they are offering, so you’ll know if the dealer’s offer is a good one.  Warning, very few people qualify for the often-advertised 0 percent interest rates, so don’t get your hopes up.
9. Check out “No Haggle” dealers. No haggle or posted-price dealerships are becoming more prevalent. These dealerships will post a non-negotiable price on the vehicle, saving you the anxiety and pressure of trying to match wits with a seasoned, professional seller.
10. Consider selling your used car yourself. The used car market is hot, and you can usually sell it for more than the dealer will pay you on a trade-in. Those extra dollars can help make up for the higher prices you’ll see in the new car showroom.  Also, check out the national chains that offer to buy your vehicle with a price that’s good for 7 days.

Contact: Jack Gillis, 202-939-1018

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Regardless of the reason, if the dealership fails to pay off your loan, you are the one responsible to the lien holder.

As a result, you could end up with two loans to pay and not enough money to do so. If you are unable to make your payments, your car could be repossessed. What’s more, defaulting on a loan can adversely affect your credit rating, making it hard for you to get a good interest rate on a future loan, mortgage, credit card or insurance policy. You might even be denied for a loan altogether. Even if the dealership does pay off the loan, if it delays making the payment to the bank your credit rating could still be downgraded.

Beyond these risks, the truth is that if you still owe money on your car, it’s probably not in your financial interest to sell it right now anyway, especially if you owe more than the car is worth. This is called being “upside down,” and usually means that your new car loan amount will include your existing loan balance on top of the price of your new car. Can you really afford all that? Remember that it is almost always cheaper to repair a car than to replace it. So the best thing to do from a financial standpoint is to pay off your existing car loan before you buy another car.

If, however, you can’t delay buying a new car because of a safety issue, growing family or other reason, be sure that you purchase the vehicle from a dealer with an excellent reputation. You can check the dealer’s complaint record with the Better Business Bureau. Before sealing the deal on your new car purchase, make sure that the written contract includes a promise to pay off the lien on your trade-in. Follow-up with your lien holder within 30 days to confirm that the dealership has, in fact, fulfilled that promise. If it hasn’t, your state or local consumer protection agency may be able to assist you.

This blog is one of a series of articles contributed by state and local consumer agencies in connection with the annual survey about consumer complaints conducted by Consumer Federation of America. The survey report provides “real life” examples of complaints and tips for consumers. Have a consumer problem or question? Find your state or local consumer agency at https://www.usa.gov/state-consumer.

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Christopher Peterson, Senior Fellow at the Consumer Federation of America (CFA) and a University of Utah Law Professor released a new policy paper: Auto Dealer Markups, Jim Crow Finance, and the Congressional Review Act: How Congress May Bend the Rules to Facilitate Overpriced and Discriminatory Auto Lending.

The report details how dealer markups are a harmful practice that inflate the price of car loans and hurt poor and minority borrowers.

Additionally, S.J. Res. 57 is a dangerous expansion of the Congressional Review Act that could lead to further gridlock in Washington and uncertainty in markets across the country—Congress has never before used this power to invalidate an action, such as the CFPB’s auto lending guidance, that a regulatory agency does not itself characterize as a regulation.

“The fact that 51 United States Senators voted to allow car dealers to discriminate against minority borrowers is shocking,” said Christopher Peterson, Senior Fellow at the Consumer Federation of America (CFA) and a University of Utah Law Professor.

“The Senate just gave a green light to misleading consumers into paying hundreds or thousands of dollars more for their vehicles than they should have to pay based on their lender’s own estimate of a fair, risk-based price for the financing,” continued Peterson.

Contact: Christopher L. Peterson, 202-387-6121 x1020

The post Congress Grants Car Dealers Free Reign to Discriminate Against Minority Borrowers appeared first on Consumer Federation of America.

Senate Joint Resolution 57, sponsored by Senator Jerry Moran (R–KS) and House Joint Resolution 132, sponsored by Rep. Lee Zeldin (R-NY) would invalidate the Consumer Financial Protection Bureau’s (CFPB) 2013 auto lending guidance using the Congressional Review Act.

The CFPB’s 2013 auto lending guidance explained that discriminatory “dealer markups” are illegal under the Equal Credit Opportunity Act. Dealer markups let car dealers trick customers into paying interest rates higher than those for which they otherwise qualify. Evidence suggests dealer markups can be discriminatory because they may result in minority groups paying higher interest rates than similarly qualified white borrowers.

The Congressional Review Act is a law that allows Congress to invalidate agency regulations with a simple majority vote in both houses. Congress has never used this power to invalidate an action, such as the CFPB’s auto lending guidance, that a regulatory agency does not itself characterize as a regulation.

According to Professor Peterson’s report, using the Congressional Review Act to overturn this protection against potentially racist auto lending is a problem for two reasons. First, dealer markups are a harmful practice that inflate the price of car loans and hurt poor and minority borrowers. Second, S.J. Res. 57 and H.J. Res. 132 are a dangerous expansion of the Congressional Review Act that could lead to further gridlock in Washington and uncertainty in markets across the country.

The report also offers advice to consumers seeking to avoid paying inflated interest rates on auto purchase loans.

Contact: Christopher L. Peterson, 202-387-6121 x1020

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A “dealer markup” occurs when an auto dealership receives an undisclosed kickback from a lender in exchange for persuading the customer to agree to a higher interest rate than the borrower qualifies for with that lender. While dealer markups inflate the cost of purchasing vehicles for customers from many backgrounds, studies show that markups can be discriminatory because they may result in some minority groups paying higher interest rates on average than white borrowers with similar credit histories.

Instead of helping the CFPB promote fair and transparent auto finance, Congress is now considering resolutions under the Congressional Review Act that would invalidate the CFPB’s guidance on discriminatory auto dealer markups. These resolutions are a dangerous and unconventional use of the Congressional Review Act, which has never before been used to attack an agency’s guidance document that merely interprets existing law.

In this issue brief, CFA:

• Calls on members of Congress to oppose S. J. Resolution 57 (Moran-KS) and H. J. Res. 132 (Zeldin-NY);
• Recommends prohibiting dealer markups that vary dealer compensation based on loan terms other than the amount financed; and,
• Advises consumers to protect themselves from dealer markups by shopping for auto finance in advance with a reputable credit union or bank instead of relying on the sales staff at an auto dealership

Download PDF

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Motor Vehicle Roundtables – Project Number P104811

BY

CENTER FOR RESPONSIBLE LENDING

CONSUMER FEDERATION OF AMERICA

CONSUMERS FOR AUTO RELIABILITY AND SAFETY

NATIONAL ASSOCIATION OF CONSUMER ADVOCATES

NATIONAL CONSUMER LAW CENTER, ON BEHALF OF ITS LOW INCOME CLIENTS

NATIONAL COUNCIL OF LA RAZA

FEBRUARY 1, 2012

We submit these comments in response to the request for comments as part of the Federal Trade Commission (FTC) Motor Vehicle Roundtables – Comment, Project Number P104811.

We call on the FTC to:

Prohibit auto dealer interest rate markups;

End yo-yo scams;

Curb loan packing; and

Implement steps to ensure that dealers do not fail to pay off liens on trade-in vehicles or cause other harms to consumers when the dealer closes.

These steps will create a fairer and more transparent automobile financing marketplace.

THE FTC SHOULD BAN DEALER MARKUPS ON INTEREST RATES

Dealer compensation should be divorced from the ability to increase interest rates from one consumer to another.  Dealer compensation should be limited to a flat fee compensation system or a fee based on a percentage of the amount financed and with adequate disclosure of the fee.

The Role of “Indirect Lending” and Interest Rate Markups in the Auto Finance Market

Auto financing through the dealer is commonly referred to as “indirect financing,” but is actually a credit transaction directly arranged by the dealer. In the vast majority of these automobile financing transactions, the dealer uses a retail installment sales contract.  Under the legal structure of the retail installment sales contract, the dealer is both the creditor and the automobile seller, and as such the dealer enters into an agreement to both sell and finance a vehicle for the customer at a certain price, a certain interest rate, and a certain number of payments (along with other terms for the loan). Although the phrase “indirect financing” views the transaction from the perspective of an assignee of that retail installment sales contract, the legally significant fact is the dealer is the creditor with whom the consumer is negotiating the transaction.

Typically, the dealer does not want to retain ownership of the retail installment sales contract and collect payments into the future.  The dealer typically borrows funds to purchase inventory (called “floorplan financing” or “floorplanning”) and must pay a portion of that loan back to the floorplan creditor upon the sale of each vehicle. Because of this, the dealer elects to sell the retail installment sales contract to a third party, such as a finance company, bank, credit union or other investor to obtain the funding to repay the floorplan financing for that automobile.

To facilitate the process, the dealer communicates with potential loan purchasers at the same time the dealer is negotiating the terms of the sale with the consumer.  Potential third-party purchasers make most of the common terms and conditions available to dealers in regularly published rate sheets and in the conditions of authorized dealer agreements that are typically entered into before loan purchasers agree to buy loans from the dealer.  When a consumer applies for credit with the dealer, the dealer sends the consumer’s financial information to one or several potential loan purchasers.  Interested purchasers then respond to the dealer with offers to purchase that contract, specifying the interest rate and specific conditions and terms that the loan purchaser will require to purchase the loan.

The interest rate that the potential third-party purchaser is willing to accept to purchase the retail installment sales contract from the dealer is called the “buy rate.”  The third-party purchaser may give the dealer the opportunity to add compensation to the transaction, also called “dealer reserve” or “dealer participation.”  This form of compensation allows the dealer to add to the interest rate and keep some or all of the difference in net present value between the buy rate and the rate ultimately offered to the consumer.  Some third parties offer a flat fee for compensation.  Some third party purchasers cap the amount of dealer interest rate markup, while others allow unlimited markups.

Some third-party purchasers charge the dealer to sell the retail installment sales contract to them, purchasing those contracts for less than face value.  These programs raise entirely different issues than the dealer markup on interest rate.  Instead, these programs result in dealers artificially inflating the cost of the car to recoup the discount at which the dealer will have to sell the retail installment sales contract.

Nearly eighty percent of financed auto sales are financed through the dealer, which effectively gives dealers control over lenders’ access to this market.[1] Dealers routinely advertise that they work with several lenders to get consumers financed or to find the best deal.  Dealers call this financing model “dealer-assisted financing” even though on every retail installment sales contract the dealer is the original creditor.  The dealers’ characterization of the transaction fosters the illusion that the dealer is more like a broker than a creditor. The characterization also paints the dealer as not in control of the process even though the dealer has the ability to choose between loans, adjust the interest rate, and structure other essential terms of the loan.  Even the “Understanding Vehicle Financing” guide that the FTC partnered with the American Financial Services Association Foundation and the National Automobile Dealers Association to produce fosters this confusion.

This mischaracterization of the dealer’s true role in the transaction is confusing to consumers and allows the dealer to use this confusion to the dealer’s advantage.

The FTC Should Prohibit Dealers from Receiving Compensation Based on Increasing the Interest Rate

The FTC should write regulations banning dealer interest rate markups in the same way that the Federal Reserve and Congress in the Dodd-Frank Act have dealt with a similar issue of compensation in mortgage lending.  In September 2010, the Federal Reserve issued final rules that, in part, banned compensation for mortgage originators and mortgage brokers that vary based on the terms of the loan other than the loan’s principal balance.[2] These rules were the product of significant study of mortgage loan compensation practices and the impact certain compensation can have on consumers and the broader market.  The findings and substance of the rule have a direct bearing on the issue of car dealer interest rate markups.

The Federal Reserve had the authority under the Home Owner’s Equity Protection Act of 1994 (HOEPA) to prohibit acts and practices in mortgage loans that the Board finds to be unfair, deceptive or designed to evade the provisions of HOEPA.[3] Because HOEPA does not define an unfair or deceptive act or practice, the Board adopted the FTC’s standards for unfair and deceptive acts and practices, finding mortgage compensation practices to be unfair.

Mortgage brokers and many retail loan officers historically received compensation that varied based on the terms of the loan.  This compensation increased if the broker or loan officer could convince the borrower to pay a higher interest rate than that for which the borrower qualified or accept other terms unfavorable to the borrower, such as prepayment penalties.

Unlike the car dealer interest rate markup, the actual amount of compensation paid to mortgage brokers was disclosed to the borrower.  In crafting the rule, the Federal Reserve conducted consumer testing and focus groups to test the efficacy of this disclosure.  The Federal Reserve had previously published proposed rules that found compensation that varied based on the terms of the loan unfair and proposed using more extensive disclosures to address the issue.  On further study, the consumer testing undertaken as part of that rule caused the Federal Reserve to withdraw the rule and instead propose and enact a rule that simply eliminated unfair compensation.

The Federal Reserve determined that the practice of compensation to mortgage originators varying with the terms of the loan causes substantial injury to consumers, is not reasonably avoidable, and is not outweighed by benefits to consumers or to competition.  Of particular note, the Federal Reserve found:

When loan originators receive compensation based on a transaction’s terms and conditions, they have an incentive to provide consumers loans with higher interest rates or other less favorite terms.  Yield spread premiums, therefore, present a significant risk of economic injury to consumers… Because consumers generally do not understand the yield spread premium mechanism, they are unable to engage in effective negotiation… These consumers suffer substantial injury by incurring greater costs for mortgage credit than they would otherwise be required to pay.[4]

The Federal Reserve’s consumer testing included several different types of disclosure and found that consumers did not understand the compensation system and its potential effect on the consumer’s loan no matter how it was disclosed.  Importantly, to the Federal Reserve this confusion was cause to eliminate the unfair compensation rather than allow loan providers to bury the information through confusing paperwork or in the annual percentage rate.  Congress agreed with the Federal Reserve in the Dodd-Frank Act.  Further, the Federal Reserve did not differentiate between mortgage brokers or loan officers of a creditor.  Regardless of how car dealers choose to portray themselves, the Federal Reserve’s legal analysis is directly applicable to the issue at hand because there is no debate that the dealer originates the loan.

Ample evidence exists to show that interest rate markups on car loans are routinely applied unfairly and that they disproportionately affect minority borrowers. This method of compensation has proven to cause great problems for minority car buyers. Even when they have the same or better credit than their white counterparts, minority borrowers are more likely to be charged higher dealer markups. Discriminatory markups have resulted in substantial class action lawsuits representing millions of black and Hispanic car buyers.

Dealer interest rate markup is also a practice with significant financial impact for consumers.  According to research from the Center for Responsible Lending, dealer interest rate markups totaled $25.8 billion in additional interest paid for those who bought cars in 2009.[5]

Further, while dealers are legally creditors, they act more like loan brokers – dealers shop loans among multiple potential purchasers of that loan and then choose one for the customer.  As stated previously, dealers routinely advertise that they work with multiple lenders to obtain financing.  Dealers refer to the financing as “dealer-assisted financing” even though the dealer is in fact the creditor.  As such, it is very important to understand the incentives behind the transaction and eliminate those that stifle competition or put consumers in more expensive loans than necessary.

The ability of the dealer to add to the interest rate for its own gain creates a perverse incentive for the dealer to push the consumer into the most favorable loan for the dealer rather than the loan that provides the lowest-cost for the consumer.   The result of these misaligned incentives is “reverse competition,” a classic illustration of market failure.   To stay in the auto finance business, lenders compete for dealers’ business by offering larger and larger interest rate kickbacks, compensation, and incentives.  This reverse competition drives prices to consumers up rather than down.  This impact on the market is the same that led the Federal Reserve to prohibit this manner of compensation on mortgage loans.

A survey of more than 1,000 people who had purchased a car in the two years prior found that those who were either told or were led to believe that the dealer had found them the best rate in the market were charged two percent more in interest on their loans than their similarly situated peers.[6] The Federal Reserve also found that those who trusted mortgage originators tended not to shop around and generally received more expensive loans as a result.[7]

The only consumer disclosure about the dealer markup is a general disclosure that informs the consumer that a dealer may be gaining compensation through the interest rate and that the buyer has the right to negotiate that rate. A CRL-commissioned poll of North Carolina voters found that an overwhelming majority—79%—were unaware of the practice, despite the general disclosure.[8] These results are completely consistent with the FRB analysis of such disclosures in the mortgage market.

Consumers cannot effectively shop if the compensation system creates perverse incentives to steer consumers into more expensive loans.

Recommendation

Dealer compensation should be divorced from the ability to increase interest rates from one consumer to another.  Rather, compensation should be based on more objective criteria that remove incentives that solely benefit the dealer.  The compensation system should incent the dealer to find the lowest-cost financing for the consumer. Dealer compensation should be limited to a flat fee from the loan purchaser or a fee based on a percentage of the amount financed with adequate disclosure of the fee.  In either case, the compensation cannot be related to the terms of the loan provided, except for the size of the loan.

A finance manager wrote in a recent column published in a trade magazine:

“…I might be walking on thin ice here, but, as far as I’m concerned, [dealer] reserve is the least important profit category in the finance office.  Yes, we earn a portion of our total profit from reserve, but it provides absolutely no benefit to the customer….I’ve said it before, and I’ll say it again: [Dealer] reserve only benefits the lender and the dealer.”[9]

Arguments made during the roundtables that eliminating dealer markups will end financing through the dealer are specious.  Dealers will still need to offer financing to sell cars, and finance sources will still seek to purchase auto finance paper from dealers.  Dealers would still receive compensation for the work performed in the financing process.   Instead, there would be a transparent system where car buyers:

• would know the exact costs of financing;

• could make an informed choice as to the value of arranging financing themselves or “hiring’ the dealer to do it for them;

• would pay a similar price for obtaining financing through the dealer as their similarly-situated peers; and

• would benefit from incentives for the dealer to find the best interest rate available to the consumer.

The FTC Should Ban Yo-Yo Scams

We urge the FTC to find that yo-yo scams are an unfair and deceptive practice.  We also ask the FTC to ban the use of spot delivery agreements unless the condition is related to something other than assignment of the finance contract and is not subject to the dealer’s discretion.

Description of the Yo-Yo Scam

The yo-yo scam occurs when a consumer believes or is led to believe that the financing is final when in fact the dealer is not treating it as final.  The dealer claims the ability to cancel the deal if the dealer decides that none of the offers by third-party assignees to purchase the finance contract are acceptable.  Yo-yo scams are possible because of the pervasive practice of conditioning or purporting to condition finance contracts on the dealer’s decision whether to accept the sale of the contract to a third-party loan purchaser.

Conditional sales agreements, spot deliveries and yo-yo scams are three different things.  In a conditional sales agreement, there is an action that the consumer must take to complete the sale, such as arranging financing to purchase car from a source other than the dealer.  In some states, the dealer is required to keep the car on its insurance policy and provide use of dealer license plates until the deal is completed and title is transferred to the buyer.[10]

A spot delivery occurs when the dealer allows the customer to drive off the lot with the car – “on the spot” – while the deal is not technically final.[11] The dealer asserts the right to cancel the deal if the dealer decides that none of the offers to purchase the financing contract are acceptable.  Most consumers either believe that the deal is final or that the deal is as good as final.  The dealer encourages the borrower to drive the car away before financing is final to remove the consumer from the marketplace. If the consumer leaves the lot thinking the contract is not final, the consumer may shop around and perhaps buy a car elsewhere.

In the yo-yo scam, the dealer allows the customer to leave the lot on a spot delivery but pulls the consumer back to the dealer like a yo-yo on a string.  The consumer is then pressured to sign a new finance contract with worse terms for the consumer.  It is the use of the spot delivery that allows for the yo-yo scam to occur.  Spot deliveries are so pervasive that nearly every finance transaction with the dealer is a potential yo-yo scam.      There are several causes that lead to yo-yo scams.  In some cases, the dealer knows the chance exists that the originally-offered financing may not be available, because the third-party purchaser may send an offer with stipulations or conditions. For example, the purchaser may want more financial information from the consumer or the purchaser may require a larger down payment or a co-signer.  In this situation, rather than take the risk that the consumer may shop elsewhere, the dealer sends the consumer home with the car and the conditions or stipulations unmet.

In other cases, the dealer does not have an offer to purchase the contract from a third-party and sends the consumer home hoping to sell the contract quickly.  Perhaps the dealer knows it cannot deliver on the financing agreement but doesn’t want to lose the consumer.  Or, the dealer is dissatisfied with the terms potential loan purchasers have offered.  Whatever the reason for entering into this type of transaction, the goal is the same.  The dealer wants to make the consumer believe the deal is final so that the consumer does not purchase a car elsewhere or decide not to purchase at all.

In the typical yo-yo transaction that a dealer has claimed to cancel, the consumer is lured back to the dealership under one of several guises.  When the customer returns to the dealer, the customer is presented with a new deal at a higher interest rate or with a larger down payment requirement in order to keep the car.  Frequently, the dealer states that “the lender” has changed its mind and won’t finance at the rate or with other terms promised.

When the dealer claims the ability to unilaterally cancel the transaction, the dealer can offer an interest rate that the dealer knows it may not be willing or able to actually provide without the risk of suffering a significant penalty.  Instead, the dealer forces the consumer to either agree to a different interest rate or loan terms or return the car to the dealer.

Of further concern, many dealers claim the right to immediately repossess the vehicle when the dealer decides to cancel the deal.  The dealer also claims the right to charge rental fees, fees for wear and tear, and for fees incurred to repossess the vehicle.

To further increase leverage on the consumer after the yo-yo string is pulled, the dealer may refuse to return the consumer’s trade-in or the consumer’s down payment.  The dealer may also threaten to charge the consumer fees for use, wear and tear, or other items. In some cases, the dealer may threaten the consumer with prosecution for auto theft if the consumer does not immediately return the car to the dealer.  Under this significant pressure, many consumers agree to the new terms.

Recommendation

We ask that the FTC find that yo-yo scams are an unfair and deceptive practice.  We also ask the FTC to ban the use of spot delivery agreements unless the condition is related to something other than assignment of the finance contract or something in the sole discretion of the dealer.

These practices give the dealer an unfair bargaining position over the consumer and distort competition.  If the dealer wants to ensure that the deal, as structured, will be to the dealer’s liking or that all conditions from the subsequent purchaser can be met, then the dealer should not allow the customer to leave the lot with the car or allow the buyer to sign a retail installment sales contract.  A credit contract should not be signed unless the dealer is prepared to honor the deal as agreed between the consumer and the dealer.

Several years ago, the Michigan Department of Commerce issued a letter stating that the practice of conditioning the retail installment sales contract upon future sale of the finance contract violates the Michigan Motor Vehicle Sales Act.[12] The logic outlined in that letter is clear and should apply universally – if the buyer signs a completed retail installment sales contract and leaves the lot with the car, then the dealer, who is the creditor on the contract, should have to stand by the terms of the contract.

Conditioning the consummation of the credit agreement on the dealer’s sale of the credit contract places the onus on the consumer when it properly belongs to the dealer.  A dealer engages in more auto financing transactions in a day or a week than the average consumer will in a lifetime.  The dealer has the experience and the wherewithal to know what potential third-party purchasers will require, while the customer has no idea.  The dealer should take the time to meet the conditions and stipulations of potential purchasers and to verify that the borrower’s information is correct.  Dealers should not be allowed to force consumers to fix the dealer’s miscalculation or haste.  Additionally, this protection will level the playing field by allowing dealers that take the time to ensure that the deal is final before delivering the car to the consumer to effectively compete in the marketplace.

The FTC Should Curb Loan PackinG

We call on the FTC to require dealers to disclose the actual costs of every ancillary product sold during the financing process, disclose the cost of the car with and without ancillary products, and prohibit dealers from representing that purchase of ancillary products is required to obtain financing.

Background

Loan packing occurs when the dealer adds a number of ancillary products to the loan amount while hiding or misrepresenting the price, terms, or value of these products. This can happen when the products are sold in a package with a number of other items and the cost of these products is expressed as an increase in monthly payment.  Loan packing can also occur when the consumer tells the dealer up front what the consumer considers an affordable monthly payment.  The dealer structures the deal in such a way that the loan has the monthly payment the consumer stated but includes as many ancillary products and as much interest rate markup as possible to maximize the profit on the deal.

The sale of ancillary products, such as extended warranties, security systems, insurance products and the like is the main source of profit for the finance department outside of the dealer interest rate markup.  These products are problematic for four reasons.  First, these products are sold at a significant price markup, and may provide limited or no value to the customer.  Second, the dizzying array of products provided to the consumer at the end of a long sales and financing process provides ample opportunity to sell customers on products that the consumer does not fully understand or have time to effectively compare to other products. Third, the sale of such add-ons contributes to negative equity and excessive debt because the cost is added to the sales price and financed into the loan the dealer is selling the customer. Fourth, the products siphon off money that could be spent to purchase a better vehicle.

The presentation of ancillary products is not consistent across the industry.  Some dealers use a menu presentation that shows the different products, their cost, and the impact on the loan.  Others sell ancillary products in packages that hide the full cost of the additional products.  Consumers are often led to believe that purchasing these products is a requirement to obtain financing or to qualify for a particular interest rate.

Recommendation

The FTC has a long history of viewing loan packing as an unfair and deceptive practice, and state UDAP laws have similarly long been used to attack loan packing.[13] To reinforce this position, and encourage more widespread compliance than sporadic enforcement has achieved, we urge the FTC to promulgate a rule that provides consistency and curbs some of the worst abuses in selling ancillary products, including the following provisions:

• Require the use of a menu that shows both the actual price of the ancillary product and the impact on monthly payments;

• Require dealers to clearly and conspicuously disclose to the customer the full price of the car with and without the ancillary products;

• Require that consumers be informed at the beginning of the transaction about the products that will be offered at the end of the transaction; and

• Prohibit dealers from representing that ancillary products are a requirement for obtaining financing.

The FTC Should Address Unpaid Liens On Trade-In Vehicles and Dealer Closures

We call on the FTC to require dealers to pay existing liens on trade-in vehicles, and take steps to assist consumers who are victim to unpaid liens on trade-in vehicles.

Background

When auto dealers go out of business, they often leave their customers in the lurch. While dealer closings have harmed consumers for decades, the current economic downturn spurred even greater dealer closings. Under the terms of the auto industry bailout, Chrysler closed 789 dealers while General Motors closed 1100 dealers, respectively.  Dealers associated with other manufacturers and independent dealers also closed by the hundreds.

One of the risks when a dealership closes is that it will not pay off liens on trade-in vehicles.  When a consumer trades-in a vehicle on which there is still an outstanding loan, the dealer promises to pay off the lien using a portion of the proceeds from the loan used to finance the vehicle the consumer is purchasing.[14] If the dealer does not follow through on this promise, the balance the consumer owed on the trade-in vehicle remains unpaid and there continues to be a lien on the vehicle.

The consumer who is driving the newly-purchased car is unaware the lien has not been paid on their old vehicle until the lender holding the lien on the car the consumer traded in notifies the consumer that the loan is in default. The consumer is now obliged to keep making the payments on their new loan, which is inflated due to the addition of the old loan into the new one, along with the loan the consumer thought was paid off. Often this is financially impossible and the consumer ends up losing the new vehicle. We have found that when dealerships closed, they have often left hundreds of consumers with unpaid liens on their trade-in vehicles.[15]

The problem of an unpaid lien turns leads to another abuse when the dealer then sells the trade-in vehicle to another consumer.  This practice is called “car kiting,” because the dealer is selling a car that the dealer does not own.  The new consumer has no idea about the existence an outstanding lien on the vehicle he or she is buying and that the dealer is selling a vehicle it does not own. Typically, the consumer makes payments to the lender, only to have their vehicle repossessed by the former owner’s lien holder.  The result is that consumers lose their down payment, thousands of dollars worth of payments, and the car.

Car kiting is devastating to consumers because it ruins their credit, often causing them to lose their vehicles through no fault of their own.  And, for many consumers, their car is their only way to get to work.  For those consumers, the loss of a car can also mean the loss of their livelihoods.  Consumers who are victimized by car kiting also tend to be responsible borrowers with good credit. Otherwise, they would not have qualified for another loan.

The negative impact is lasting, since repossessions remain on consumers’ credit histories for seven years. Because employers commonly pull credit reports as a condition of employment, and landlords rely on credit reports to assess the viability of prospective tenants, the fallout from unpaid liens traps consumers in a cycle of debt and ruined credit that also becomes a barrier to employment and housing.

Among the other problems consumers encounter due to dealership closings:

• Consignment sales — dealers sell the trade-in vehicles, then pocket the proceeds;

• Prepaid service plans or services — dealers offer prepaid “lifetime” services, like free oil changes that are redeemable only at the dealership, then go out of business — sometimes within a short period of time;

• Unfunded add-ons — Dealers sell extended service contracts, “guaranteed asset protection” plans (GAP), roadside assistance, and other insurance or service-related add-ons, then keep the proceeds without passing through the payment or activating the policy;

• Vehicles Left for Service — when the dealership closes, consumers are unable to access their cars.

Some states — including Virginia, West Virginia, and California — have established restitution funds for victims of dealer closings.  More typical are states that require dealers to post bonds, which are usually in such small amounts that they are exhausted by the first few claims.  Other states like Washington and Illinois have set up task forces including motor vehicle departments and/or state attorneys general.

Recommendation

We recommend that the FTC:

• Engage in rulemaking to require dealers to pay off liens on traded-in vehicles before they sell them, along the line of California’s SB 95;

• Establish a task force with state attorneys general, district attorneys, and state motor vehicle departments to promptly identify victims, particularly those in the military, of dealership closings and work to mitigate the damage to consumers, helping restore their credit and enabling them to re-enter the auto market and either keep their jobs or find new ones;

• Publicly seek complaints from victims and take appropriate action, including enforcement efforts and referrals to the U.S. Department of Justice for criminal enforcement; and

• Work with states that have established restitution funds to help raise consumer awareness about the existence of the funds.

Data Collection

More publicly-available data would help to effectively monitor the auto lending market.  In particular, data about dealer interest rate markups, even in the aggregate, would be illuminating.  The FTC could collect data on the number of finance contracts that are renegotiated to further study the impact on consumers.  And, data about the penetration rate of add-on products and which customers are most likely to purchase them would also help to determine whether additional scrutiny on those products is required.  We would be glad to work with FTC to determine appropriate data to collect.

Conclusion

We thank the FTC for its attention to the issues related to auto financing.  We urge the FTC to take action on these abuses, as they unnecessarily cost consumers billions of dollars each year and prevent transparency and fairness in this market.

[1] Richard Howse, “How Different is the Indirect Channel from the Direct Channel?”, JD Power & Associates, Mar 31, 2008.

[2] 75 Federal Register 58509 et seq. (September 24, 2010).

[3] 15 U.S.C. 1639(l)(2).  This authority has now passed to the Consumer Financial Protection Bureau.

[4] 75 Federal Register 58509, at 58515.  Research from the Center for Responsible Lending supported this finding – broker compensation led to subprime consumers paying more than necessary, and the compensation system led to discriminatory pricing, particularly for subprime borrowers.  See Keith Ernst, Debbie Bocian, and Wei Li, Steered Wrong: Brokers, Borrowers, and Subprime Loans, Center for Responsible Lending, April 8, 2008.

[5] Delvin Davis and Joshua M. Frank, Under the Hood: Auto Loan Interest Rate Hikes Inflate Consumer Costs and Loan Losses, Center for Responsible Lending, April 19, 2011

[6] CRL conducted survey through Macro International’s CARAVAN interviews and includes a sample size of 1,007 customers across the U.S., 81% of whom owned a car or truck as of Nov 2008. The primary findings are based on approximately a quarter of those respondents (sample size of 268) who reported using a loan financed through their car dealership.  Survey on file with CRL.

[7] 15 Federal Register 58509 at 58515.

[8] Public Policy Polling Survey of North Carolina Voters (on file with CRL). Similarly, a California statewide poll commissioned by Consumers for Auto Reliability and Safety and CALPIRG found that most people surveyed thought that such practices were already illegal. Ninety-three percent of respondents favored requiring dealers to disclose the lowest interest rate the buyer qualified for. Decision Research “California Statewide Voter Survey Report,” 2004.

[9] Marv Eleazer, “The Great Rate Debate,” F&I Showroom News (October 7, 2011).

[10] See, e.g., N.C.G.S. 20-75.1.

[11] Shoals Ford, Inc. v. Clardy, 588 So.2d 879 (Ala. 1991).

[12] Letter of Murray Brown, Deputy Commissioner, Michigan Department of Commerce, found at https://web.archive.org/web/20170502052045/http://www.michigan.gov/documents/cis_ofis_spotdel_24239_7.pdf.

[13] See, e.g. National Consumer Law Center, The Cost of Credit §§ 8.5.4, 8.7.4 n. 837 (4^th Ed. 2009).

[14] For more information about the scope of negative equity and its impact on the auto market leading up to the market’s collapse, see comments by Nobel Prize-winning economist Nouriel Roubini, posted at:

http://www.economonitor.com/nouriel/2008/05/04/negative-equity-in-auto-loans-and-the-bust-of-the-auto-bubble/

[15] For data about the scope of the problem and specific examples, see the legislative analysis for California SB 729, sponsored by the California District Attorneys Association, establishing a restitution fund for victims of dealer closings, posted at: http://www.leginfo.ca.gov/pub/07-08/bill/sen/sb_0701-0750/sb_729_cfa_20070425_141418_sen_comm.html, legislative analysis for California SB 95 (Corbett, 2009), sponsored by Consumers for Auto Reliability and Safety, to require auto dealers to tender payment on liens before they transfer ownership of vehicles, or within 21 days. In addition to being supported by many consumer organizations, this measure also attracted supported from the California Bankers Association, California Credit Union League, Alliance of Auto Manufacturers, California Financial Services Association, Carmax, Alameda County District Attorneys Association, Los Angeles County District Attorneys Association, and California Statewide Law Enforcement Association.

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“Our country’s current financial meltdown starkly demonstrated how the lack of consumer and investor protections not only harmed millions of families, but also pushed our economy to the brink of collapse,” said Travis Plunkett, CFA’s Legislative Director. “Americans have paid dearly for bad financial regulation through the loss of their homes, jobs, and retirement and college savings, not to mention skyrocketing credit card interest rates and $40 overdraft fees for a cup of coffee. The time has come for Congress to repay taxpayers who bailed out the financial institutions by passing comprehensive regulatory reform.”

“Enactment of H.R. 4173, including a strong Consumer Financial Protection Agency (CFPA), will be a big step in helping consumers who have been at the mercy of both abusive lenders and inattentive regulators,” continued Plunkett.  “With the passage of a strong bill, consumers will finally have a cop on the beat, ensuring that consumers can take out a loan without falling prey to the tricks and traps that have become all too common in consumer lending.”

“We applaud the House for including provisions in the bill that will shore up badly needed investor protections,” said Barbara Roper, CFA’s Director of Investor Protection.  “H.R. 4173 includes a number of long-sought provisions to both enhance protections for investors in their dealings with securities professionals and strengthen the Securities and Exchange Commission.  It also provides much needed regulatory oversight of credit rating agencies and derivatives markets, two areas that played an instrumental role in turning a U.S. housing crisis into a global economic catastrophe.”

The Consumer Federation has identified a number of areas where improvements to the legislation are needed and urges members of Congress to support strengthening the bill:

Consumer Financial Protection Agency (CFPA):

• Give the CFPA oversight of auto dealers when they sell or advertise loans.
• Ensure that CFPA rules generally provide a floor of consumer protection, allowing states to enact and enforce tougher laws to protect their citizens.  CFA opposes amendments to further preempt states from enacting and enforcing their own laws.

Investor Protection:

• Remove authority for the Securities and Exchange Commission to delegate essential oversight of investment advisors to the industry self-regulatory body, the Financial Industry Regulatory Authority.
• Restore requirements in the “Sarbanes-Oxley” law that publicly traded companies of all sizes take steps to prevent accounting fraud.

Credit Rating Agencies:

• Increase the accountability of credit rating agencies by clarifying that they are legally accountable to those who use their ratings and by lowering the liability standard to “gross negligence.”  CFA opposes amendments to weaken the liability provisions of the bill.  Strengthen the independence of credit rating boards to make them more responsive to the interests of users of credit ratings.

Derivatives:

• Narrow the exemption of “major swap participant” to ensure that it does not allow financial institutions, such as hedge funds, to escape the central clearing requirement.
• Allow the CFTC to regulate foreign exchange swaps and forwards without having to get approval from the Treasury Department.
• Require all standardized transactions to go through central clearing or be executed through a swap execution facility.
• Allow the SEC and CFTC to set margin requirements for swap transactions that are not required to go through central clearing.  Allow the CFTC to use non-cash assets when determining capital requirements for non-bank swap dealers and major swap participants.  Permit the CFTC and SEC to ban abusive swaps and allowing illegal swaps to be voided.

Mortgage Foreclosure Prevention:

• Permit bankruptcy judges to lower the amount of principal that financially distressed homeowners owe on mortgage loans for their primary residences.

“With passage of a strong H.R. 4173, Congress will be halfway towards the goal of cleaning up the mess that helped to cause our economic meltdown,” said Plunkett.  “When consumers and investors feel more comfortable in the marketplace we all benefit.  We urge the Senate also to quickly enact these strong provisions.”

The post CFA Urges House to Strengthen and Pass H.R. 4173, the Wall Street Reform and Consumer Protection Act appeared first on Consumer Federation of America.

En los prestamos de autos usados en el año, los hispanos pagaron una tasa de interés típica (media) de 9.0 por ciento comparado con una tasa típica de 7.5 por ciento para todos los que toman prestado.  Aun más, un porcentaje mucho más alto de latinos tenía más probabilidades que otras personas en los Estados Unidos de pagar tasas de interés por autos usados de hasta 15 por ciento; 18.5 por ciento de los latinos que toman prestado, comparado con el 9.2 por ciento de todas las personas en los Estados Unidos.

Sin embargo, no habían grandes disparidades en las tasas de interés típicas de los préstamos para autos nuevos, 5.5 por ciento para los hispanos 5.0 por ciento para todos en Estados Unidos.  Y el por ciento de estos préstamos sobre 15% para ambos grupos fue pequeño y casi el mismo, 1.8 por ciento para los latinos y 2.2 por ciento para todos en Estados Unidos.

“Uno podría especular que los inmigrantes que han llegado recientemente, con bajos ingresos y poca experiencia negociando tasas de interés más bajas casi siempre compran autos usados”, dijo Stephen Brobeck, director ejecutivo de la Federación Estadounidense de Consumidores (CFA, por sus siglas en inglés), que supervisa la campaña Hispanic America Saves. “Eso puede ayudar a explicar la diferencia en las tasas de interés en los préstamos de autos usados, la cual no existe en las compras de autos nuevos.”

“Hemos visto a inmigrantes que han llegado recientemente, tener dificultades con los préstamos de autos que pagan altos intereses y en los peores casos, pueden diezmar sus finanzas.  Pero al mismo tiempo, tener un carro provee acceso a trabajos y oportunidades.  Es por esto que trabajamos para brindar a los consumidores consejo y apoyo para tomar decisiones inteligentes al comprar un carro, para que el comprar un carro sea un paso hacia la estabilidad financiera, no una barrera”, dijo Angelo González, director del proyecto de Independencia Económica en el Consejo Nacional Cubanoamericano (CNC, por sus siglas en inglés). González también coordina la campaña Miami Saves.

Los latinos que compran autos pueden tomar medidas para asegurar las tasas de interés más bajas posibles en los préstamos de autos

“Uno de los pasos más importantes que los hispanos pueden tomar para reducir las tasas de interés en los préstamos de autos es llamar o visitar a su cooperativa de crédito para una cotización de su tasa de interés antes de ir al concesionario de autos”, señaló Patty Briotta, gerente de relaciones públicas de la Asociación Nacional de Cooperativas Federales de Crédito (NAFCU, por sus siglas en inglés).  “Al hacer su investigación por adelantado y tal vez asegurando la aprobación previa a través de su cooperativa de crédito, ellos pueden comparar las tasas de financiamiento y mejorar tremendamente su capacidad de negociación.”

Una investigación detallada realizada por académicos a principios de esta década, utilizando datos de millones de préstamos de automóviles, reveló que las minorías tenían muchas más probabilidades de que las tasas de interés en sus préstamos fueran más altas que las de las personas que no pertenecían a grupos minoritarios.  Como resultado, las cortes ordenaron a la mayoría de las más importantes compañías de financiamiento de automóviles que pusieran un tope a las tasas de interés, usualmente a 2 ó 3 puntos porcentuales sobre las tasas de compra y a proveer fondos para programas de educación a los consumidores de grupos minoritarios.

Más allá de buscar cotizaciones en dos lugares (su banco o cooperativa de crédito y un concesionario automotriz o una compañía de financiamiento), los latinos pueden reducir las tasas de sus préstamos de autos y sus gastos tomando pasos para aumentar su puntuación de crédito, la cual es la medida clave de su solvencia.  Lo más importante:

• Pague todos sus préstamos a tiempo. Realizar sus pagos 60 o aun 30 días tarde puede reducir significativamente su puntuación de crédito y aumentar el costo de sus intereses.
• No asuma más deudas de las que puede manejar. Más importante aún, no tome prestado en muchas tarjetas de crédito y no use más de la mitad de las líneas de crédito disponibles en esas tarjetas.

Una manera aún más efectiva de reducir los gastos por concepto de intereses de préstamos de autos es tomar prestado menos dinero en un periodo más corto de tiempo. Considere comprar un auto usado en lugar de uno nuevo o considere comprar un auto nuevo que sea menos costoso.  Obtenga un préstamo por un periodo de tiempo más corto, por ejemplo, por 4 años en lugar de 5 ó 6.  Los préstamos más cortos también reducen las probabilidades de amortización negativa, lo que sucede cuando la deuda del préstamo es mayor que el valor del carro.

La campaña Hispanic America Saves de CFA trabaja para educar y ayudar a los compradores de automóviles

Desde el año 2004, la campaña Hispanic America Saves de CFA ha trabajado para ayudar a los compradores de autos a hacer sus compras de la manera más inteligente posible, educándolos sobre cómo y cuándo comprar y cómo investigar acerca de sus opciones de autos, buscar diferentes alternativas para obtener un préstamo y negociar la compra.

Trabajando con esfuerzos locales de Saves y organizaciones aliadas, la campaña ofrece talleres para compradores potenciales y materiales educativos bilingües, incluyendo folletos, hojas sueltas y videos.  Desde el comienzo del año, la campaña ha provisto un nuevo conjunto de materiales educativos a más de 300 organizaciones comunitarias. La campaña ha llegado a decenas de miles de individuos a través de los talleres y el internet.

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The post Hispanic Americans Pay Higher Used Car Loan Rates appeared first on Consumer Federation of America.

• On 2004 loans for new car purchases, blacks paid a typical (median) rate of 7.0% compared to a typical rate of 5.0% for all borrowers. On used car loans, AfricanAmericans paid a typical rate of 9.5% compared to a typical rate of 7.5% for all borrowers.  This rate gap of two percentage points is much higher than the rate gaps of 1.3 and 1.2 percentage points for 2001 new and used car loans respectively reported by the Fed.
• A far higher percentage of African-Americans, than other Americans, were likely to pay auto loan rates of at least 15%. For new car loans, in 2004 6% of African-American borrowers paid this much, compared to only 2% of all Americans.  For used car loans, 27% of black borrowers paid this much, compared to only 13% of all borrowers.
• The percentages of black households and all other households with at least one auto loan differed little — 32% of all African-American households and 35% of all households.

“It’s hard to believe that any differences in credit-worthiness explain all of these rate gaps,” said Stephen Brobeck, CFA’s Executive Director.  However, he added:  “AfricanAmericans can take steps to lower their auto loan costs.  Most importantly, they should call their bank or credit union for an auto loan rate quote before talking about financing with a car dealer or finance company.”

Calling one’s bank or credit union for a rate quote will minimize the chances of a car dealer marking up the loan rate above the risk-related “buy rate.”  Detailed research by academics, earlier this decade, of data on millions of auto loans revealed that minorities were far more likely to have their auto loan rates marked up than non-minorities.  As a result, courts ordered most major car finance companies to cap rates, usually at 2-3 percentage points above the buy rates, and provide funds for minority-related consumer education.

CFA utilized the services of Professor Catherine Montalto, a professor at The Ohio State University to analyze the latest Survey of Consumer Finances data, which was collected in 2004 and released last year.  These data are for a representative sample of about 3,000 American households.

How to Reduce Auto Loan Costs

Beyond two-stop comparison shopping (your bank/credit union and a car dealer or finance company), African-Americans can reduce their auto loan rates and expenses by taking steps to raise their credit scores, the key measure of credit-worthiness.  Most importantly:

• Make all loan payments on time. Making payments 60, or even 30, days late can significantly lower one’s credit scores and raise one’s interest costs.
• Don’t take on more debt than you can handle. Most importantly, don’t borrow on many credit cards and don’t use more than half of the credit lines available on these cards.
• An even more effective way to reduce auto loan interest expenses is to borrow less money over a shorter period of time. Consider purchasing a used rather than a new car or consider purchasing a less expensive new car. Take out a loan over a shorter period of time, say, 4 years rather than 5 or 6. Shorter loans will also reduce the chances of negative amortization — or being “upside-down” on your loan — which is when you owe more than your car is worth.

The post African-Americans Pay Higher Auto Loan Rates But Can Take Steps to Reduce This Expense appeared first on Consumer Federation of America.

However, African-Americans can take steps to reduce this interest gap, which reflects factors under their control as well as hard-to-control factors related to credit risk.  Most importantly, car buyers need to make certain that they are paying an annual percentage rate related to their credit risk, not one marked up by the car dealer or other loan seller above the risk-related “buy rate.”

The most important action car buyers can take is to call their bank or credit union for an auto loan rate quote before talking about financing with a dealer.  “A simple call to your bank or credit union for a rate quote may well save you more than a $1,000 in interest costs on your auto loan,” said CFA Executive Director, Stephen Brobeck.

The difference in auto loan rates between African-Americans and other Americans was revealed by an extensive survey, conducted by the Opinion Research Corporation in November 2005, of more than 2000 adult Americans.  The survey also revealed that the proportion of African-Americans with auto loans (29%) is nearly as high as the proportion of other Americans with these loans (33%).

How to Reduce Interest Charges

Beyond two-stop comparison shopping (your bank/credit union and a car dealer), African-Americans can reduce their auto loan rates and expenses by taking steps to raise their credit scores, the key measure of creditrisk.  Most importantly:

• Make all loan payments on time. Making payments even 60 days late can significantly lower one’s credit scores and raise one’s interest costs.
• Don’t take on more debt than you can handle. Most importantly, don’t borrow on many credit cards and don’t use more than one-half of the credit lines available on these cards.

An even more effective way to reduce auto loan interest expenses is to borrow less money over a shorter period of time. Consider purchasing a used rather than a new car or consider purchasing a less expensive new car.  Take out a loan over a shorter period of time, say, 4 years rather than 5 or 6.  Shorter loans will also reduce the chances of negative amortization—or being “upside-down” on your loan—which is when you owe more than your car is worth.

The post African-Americans Pay Higher Auto Loan Rates But Can Take Steps to Reduce This Expense appeared first on Consumer Federation of America.

The report, prepared by Dr. Mark Cohen of Vanderbilt University, is based on examination of records of 383,652 AHFC customers over the period, June 1999 to April 2003. It concludes that African-American borrowers consistently paid higher “finance markup charges” over average than white customers when they finance their cars at dealerships through AHFC. The study controlled for factors such as term of loan, type of vehicle, creditworthiness of borrower, and geographic area.

Auto loan markups occur when lenders allow car dealers to mark up auto loans above the “buy rate” reflecting the actual creditworthiness of borrowers. A growing body of evidence reveals that hundreds of thousands of consumers, perhaps millions, have trusted auto finance companies and car dealers to charge them fair and reasonable rates only to then be subjected to markups that, in the past, have often exceeded five percentage points. A report, which was released by CFA, the National Council of La Raza, and the Rainbow-PUSH Coalition early this year, estimated that these overcharges cost consumers at least $1 billion annually.

The harm of loan markups goes well beyond their discriminatory impact on AfricanAmericans and Hispanics and affects all consumers noted Stuart Rossman, Director of Litigation at the National Consumer Law Center (NCLC), and a co-counsel for plaintiffs in several auto loan markup cases: “In addition to more costly monthly payment obligations and greater indebtedness, markup policies expose all customers to a higher incidence of various harms including ineligibility for future financing programs through other lenders, exposure to higher credit costs under tiered pricing systems used by other lenders, and more frequent delinquencies and defaults, resulting in increased rates of repossession and bankruptcy.”

The Reverend Jesse Jackson, President of the Rainbow/PUSH Coalition, promised that “Rainbow/PUSH will continue to advocate for car interest rates that are not determined by one’s skin color or economic status.”

Honda Auto Loan Markups Are Much Higher for African-Americans

Dr. Cohen’s report contains the following important findings:

• 43.3 percent of African-American Honda Finance borrowers were charged a markup, compared to only 22.2 percent of white borrowers.
• African-American borrowers on average paid more than two times the amount in subjective markups compared to whites — $557 versus $227, a difference of $330.
• Honda used a unique practice in which customers from different credit tiers were charged different markups. While most new car buyers were limited to either a zero or two percentage point markup, those from the least creditworthy tier could be charged a 3.5 percentage point increase. There appears to be no business justification for this differential markup policy since differences in creditworthiness are reflected in the “buy rates.”
• Honda does not prohibit the practice of “tier bumping,” where dealers can arbitrarily assign customers a higher credit risk rating when arranging financing. Because of the credit tier pricing policy, customers who were given this higher rating were effectively subjected to two loan markups reflecting piggybacked discriminatory policies.

Consumer Leaders Ask Honda to Reform Its Practices

The Cohen report analyzes Honda lending data disclosed in a discrimination lawsuit against the lender filed in federal court in Tennessee. In addition to NCLC, this lawsuit was filed by the law firm of Cunningham, Bounds, Yance, Crowder and Brown and the law offices of Clint Watkins, Michael Terry and Wyman Gilmore. A similar lawsuit was filed in California state court by former U.S. Assistant Attorney General for Civil Rights, Bill Lann Lee, of the firm Lieff, Cabraser, Heimann and Bernstein, who is counsel for plaintiffs in Pakeman v. American Honda Finance Corporation.

Also in California, Consumers for Auto Reliability and Safety, a non-profit auto safety and consumer advocacy organization, is promoting state legislation, AB 1839, authored by California Assemblymember Cindy Montanez, that will be the strongest regulation in the nation to curb auto dealer/lender markups. AB 1839 would curb markups at 2 percentage points for loans of 60 months or less, and at 1 percentage point for longer loans.

In response to similar litigation and requests by consumer groups, state attorneys general, and even industry experts to end the markups, several auto finance companies have revised their lending practices. For example, General Motors Acceptance Corporation imposed a 2.5 percentage point cap on the dealer markup as a result of a settlement negotiated in a lawsuit alleging discrimination in the markup. And, Ford Motor Credit Corporation subsequently lowered its cap to 2.5 percentage points following findings of discrimination and consumer gouging in FMCC auto finance markup practices.

While heartened by this progress, and by consumer education efforts undertaken and funded by the auto loan finance companies, consumer groups still object to auto loan markups in principle. “Creditworthiness is entirely taken into account by the buy rate at which lenders are prepared to extend credit to car buyers,” said Brobeck. “Dealers should be permitted to charge lenders a reasonable processing fee but not to arbitrarily mark up loan rates above the buy rates and to do so without disclosing these markups,” he added.

“What is striking here is that, while the nation’s top two auto lenders have begun correcting the practice, Honda has refused to respond,” said Brobeck. “Our hope is that the findings of this latest report will encourage Honda to change its abusive lending practices,” he added.

CFA is a federation of some 300 consumer groups that seeks to advance the consumer interest through research, education, and advocacy.

A summary of the Cohen report is available at: www.consumerfed.org/hondasummary.pdf The full Cohen report can be found under the heading AHFC at www.nclc.org/initiatives/cocounseling/examples_litigation.shtml

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“All credible research has found that anti-competitive state laws restricting new car sales not only cost consumers billions of dollars annually right now, but also severely limit the ability of the auto industry to realize Internet-driven efficiency gains in the future,” said CFA Research Director Dr. Mark Cooper, author of the study, “A Roadblock on the Information Superhighway: Anti-Competitive Restrictions on Automotive Markets.”

A related survey conducted for CFA by Opinion Research Corporation International (ORCI) found that consumers strongly oppose state restrictions on new car sales and strongly desire the ability to purchase new cars through the Internet directly from manufacturers or third parties.

“Consumers who have gotten used to shopping for many products through the Internet now want a similar ability to purchase new cars online,” said CFA Public Information Director Jack Gillis, longtime author of “The Car Book” and other car-related publications.

Existing and Proposed State Laws Restrict Competition in Auto Sales and Service

While most states restrict competition in auto sales and service in some fashion, several have enacted or are considering legislation that would particularly harm the consumer interest. In these states: Relevant marketing area (RMA) laws allow dealers to block new seller and repair entrants. Other laws require warranty work to be performed by dealers. Still other laws restrict the ability of consumers to purchase cars on the Internet by requiring that new cars be sold by dealers.

In Arizona: “State laws limit consumer purchase and financing of new motor vehicles to car dealers,” said Phyllis Rowe, President of the Arizona Consumer Council. “These statutes severely restrict consumer purchase options in the age of the Internet,” she added.

In Texas: “The Department of Transportation has been suing or threatening to sue not only auto manufacturers and dot.coms, but also consumer groups, to prevent them from offering new car shopping methods to consumers,” said Robert Krughoff, President of the Center for the Study of Services, publisher of Checkbook magazines. “This state enforcement of anticompetitive laws severely restricts consumer access to critically important information about car prices,” he added.

In Florida: “State laws discourage competition for warranty work by limiting these repairs and maintenance to dealers and by limiting dealer expansion of service facilities,” said Walter Dartland, Executive Director of the Florida-based Consumer Fraud Watch. “These anticompetitive restrictions increase costs and reduce convenience,” he added.

In Virginia: “New legislative proposals would limit the ability of manufacturers to reward pro-consumer dealers who charge low prices and offer good service,” said Irene Leech, President of the Virginia Citizens Consumer Council. “These bills would further restrict consumer competition among auto dealers,” she added.

Economic Analysis Uses Past Research to Estimate Consumer Costs

The CFA study examines three types of evidence to assess the impact of vertical restraints on automobile dealer markets — econometric studies of restrictive state laws, economic analysis of potential efficiency gains from streamlining marketing and distribution of new motor vehicles, and studies of price savings from Internet purchases of consumer products.

The study also reveals that the number of states with restrictive laws increased from only two in 1970 to 41 today. Recently, as the potential for Internet sales has increased, dealers have urged state legislatures to pass even greater restrictions on direct sales to the public and to insist on more aggressive enforcement of existing restrictions.

The study reviews over one dozen empirical studies and regulatory reviews of territorial restraints on distribution. It finds that empirical econometric evidence shows how consumers are harmed.

• Restrictions on entry and distribution channels reduce the number of dealers, creating local market power for the protected dealers and resulting in higher margins for dealers, and higher prices for consumers in the range of 6-8 percent per car.
• The longer the laws are in effect and the faster the market changes, the greater the impact. Time and growth are so important because it is the reduction of dealerships relative to the market that enhances market power. The study shows how the Internet can dramatically increase efficiencies, thus lowering consumer costs, in automobile markets.
• The ability of consumers to gather information online facilitates comparison shopping.
• Higher quality visual and video images that can be modified at the direction of consumers promise a quantum leap in the quality of marketing and consumer information gathering.
• Increasing integration of production with consumer preferences (personalized selling) identified through online transactions, combined with flexible production, can dramatically reduce marketing, inventory, and transit times for the delivery of goods.

Analysis of efficiency gains from rationalizing marketing and distribution of new vehicles is projected at 10 percent per vehicle. Econometric studies of price savings resulting from Internet purchases of consumer products have consistently estimated these savings in range of 10 to 15 percent. However, in this study, to be conservative, we are utilizing the estimate of only a 6 percent cost savings per vehicle. With these vehicles presently averaging $25,000 in price, and about 14 million sold, this 6 percent saving would amount to $1,500 per vehicle which results in a total consumer savings of more than $20 billion annually.

Consumers Voice Strong Opposition to Sales Restrictions and Support for the Opportunity to Make Online Purchases

In their CARAVAN survey of 1,029 representative adult Americans, ORCI found that consumers strongly oppose restrictions on new car sales and strongly favor the ability to purchase cars online.

• 78 percent said they disagree (59 percent “strongly” so) with “laws that require all car sales to go through car dealerships.” Only 19 percent agree with these laws (just 6 percent “strongly” so).
• Respondents said these laws “unjustifiably limit consumer choice” (by 58 to 37 percent), “tend to raise car prices” (by 60 to 36 percent), and “limit consumer ability to purchase cars conveniently” (by 64 to 32 percent). Only 43 percent think that these laws would “prevent manufacturers from taking advantage of consumers.”
• Similarly, 78 percent think “consumers should have the ability to purchase cars directly from manufacturers or third parties using the Internet (51 percent “strongly” so). Only 16 percent disagree.

The survey also found that consumers strongly support consumer choice of shops to do warranty work. 71 percent think “car owners should be permitted to have manufacturer-paid warranty work performed by independent repair shops” (47 percent “strongly” so); 25 percent disagree.

Not surprisingly, the 59 percent of respondents who say they “have regular access to the Internet for personal use” are the most strongly opposed to restrictions and supportive of consumer choice. Eighty-nine percent of those with access agree that consumers should have the ability to buy cars directly from manufacturers through the Internet while only 64 percent of those without access agree.

Also, those who most frequently purchase cars tend to oppose restrictions and support choice. Of the 58 percent of respondents who had purchased a car from a dealer in the past five years, 82 percent agree that consumers should be able to buy cars from manufacturers through the Internet compared to 73 percent of non-buyers who agree.

ORCI conducted the survey during the period January 5-8, 2001. The margin of error is plus or minus three percentage points.

Study Addresses Concerns About Manufacturer Discrimination Against Dealers

The Cooper report also examines potential unintended negative effects that have been invoked by dealers to defend or extend laws restraining direct sales of motor vehicles. It concludes that there is little likelihood these consequences would materialize, for several reasons: First, increased competition would make it difficult for any party to gain market power. Second, warranties would remain in force. And third, when the most popular dealerships expanded, quality repair and maintenance services would be more available. Fourth, general consumer protection laws would remain in force.

However, the report also recommends the establishment of new protections. While new distribution channels should be open, the report supports imposition of reasonable licensing requirements for new sellers of automobiles. In addition, protections for dealers should be created to ensure that, when manufacturers are allowed to sell vehicles and service directly, they not discriminate against competing dealers. It proposes new state laws to give dealers a private right of action to pursue claims of discrimination under contract law.

A copy of the report is available at: www.consumerfed.org/internetautosales.pdf.

Contact: Jack Gillis, CFA, 202-737-0766

CFA is a non-profit association of 270 pro-consumer groups that, since 1968, has sought to advance the consumer interest through advocacy and education. ###

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