In the big game of chicken, the score is car dealers 1, the feds 0. The country’s biggest auto lender, Ally Financial, was asked by the nation’s consumer agency to use a fairer method of making auto loans. But since it was just a recommendation, Ally told ‘em to stick it where the sun don’t shine.
Car loans are the second-biggest debt most people take on, after buying a house. So we expect them to be administered fairly by car dealers. Alas, it ain’t so, because women and minorities are often hit with higher interest rates just because, well, they’re not white men.
We set up the federal Consumer Financial Protection Bureau (CFPB, the agency with the big conservative target on its back) just to fight this kind of problem but we’re talking about politics here, and well-connected car dealers managed to get themselves exempted from its regulation.
At issue, according to Automotive News, is something called “dealer reserve,” or dealer mark-up. That’s the amount, usually less than two percentage points, that dealers are free to add to a consumer auto loan. If that markup targets groups of people, it’s discriminatory. And a CFPB analysis of 800,000 loans found that African-American customers paid on average a quarter of a point more, or about $300 in total, and Hispanics a fifth of a point, or about $200 extra.
Ally signed a $98 million Justice Department consent decree to address just this problem. The complaint said the company had misused 235,000 minority buyers, but that doesn't mean the company is going to change its ways by switching from dealer reserve to a fairer flat fee system. “We are not going to be the Trojan horse for driving industry change,” Ally CEO Michael Carpenter said. “We’re not going to go to flats. That is obviously not what the CFPB wanted to hear. They thought we were going to cave.”
Ally’s argument is that if it dropped the reserve set-up its dealer customers—who are used to getting what they want—would simply get their loans elsewhere.
I started my career working for a car dealership, and I’ve always thought of them as fiefdoms unique in America. I once published a story about filthy rich dealers racing each other in big luxury yachts, and that gives a good picture of the buckets of money they make when times are good. I asked my friend Jim Henry, who wrote Auto News’ coverage of the Ally/CFPB imbroglio, to explain how the dealers get away with this. His reply:
Ally's concern is that the dealers would abandon them if they switched to flat fees. There’s an inherent assumption in here that flat fees would be less for dealers. It seems like somebody should be able to come up with a pay scheme that would be revenue-neutral for the dealers and satisfy the CFPB at the same time, but if anybody has it they’re not saying. I think primarily nobody wants to go first.
Car dealers are one big-time powerful lobby when they can agree on something, which isn’t all the time. What do you see at car dealerships? Trophies and plaques from every Little League, Pop Warner football team, Boy Scout Troop, bowling league, you name it, within 25 miles. Whose advertising makes up so much of your struggling, so-last-century local newspaper? Whose ads do you hear on the radio? At the grassroots, they are a lobbying force not to be trifled with. They managed to get themselves "carved out" of the CFPB’s jurisdiction when the CFPB was still an embryo, over the howling objections of the [now-Senator] Elizabeth Warrens of the world.
The aforementioned Warren is a dedicated consumerist, and the driving force behind the creation of the CFPB. Now, from her perch in the Senate, she’s like a dog with a bone when it comes to car loans. Watch this video, in which she questions CFPB head Richard Cordray about the loophole that allows dealers and the lenders that work with them to escape binding loan regulation. It’s obvious where she stands: