The Battle for Auto Financing

Some new legislation making its way through the U.S. Congress pits the wishes of America’s auto dealers against those of the Consumer Financial Protection Bureau (CFPB) — with both sides claiming to have the best interests of the consumer in mind.

The legislation — now before the House – is H.R. 1737 – and its name, the “Reforming CFPB Indirect Auto Financing Guidance Act of 2015,” leaves little mystery as to its purpose.

It’s the CFPB vs. the Auto Dealers

Representatives Frank Guinta (R-N.H.) and Ed Perlmutter (D-Colo.) introduced the legislation, which has been widely praised by auto finance companies, as well as the National Automobile Dealers Association.

The Congressmen, and the NADA, say that the legislation addresses a CFPB bulletin from 2013, which they say was a misguided attempt to pressure lending institutions into eliminating the availability of auto financing discounts.

They say that CFPB’s guidelines would cost consumers billions of dollars in higher automobile financing costs.

CFPB say that their guidelines are designed to eliminate auto financing practices that are discriminatory, and cost Americans billions in extra auto finance charges every year.

Who is right in this? Before you can answer, you have to understand the way third party auto financing works.

Buy Rate vs Contract Rate

You see, the auto loan rate you are quoted is not always the one the lender requires. When your dealer submits your application to a third party lender, the lender quotes what is called the “buy rate.” This is the amount of interest that the lender needs to receive, based on the lender’s assessment of your credit worthiness.

However, your dealer may be allowed additional interest on top of that buy rate, to arrive at what is called the “contract rate.” This is the rate that you are quoted.

Different lenders have different policies with regard to how this differential is determined, but the end result is the same: you, the customer, pay more for financing than the lender really needs to collect.

CFPB says that the difference between the buy rate and the contract rate can be steep, and that this difference is often greater when the applicant is a member of an economically vulnerable group.

Essentially, they claim that the buy rate/contract rate differential is an unregulated mess, and an invitation to abuse by unscrupulous lenders, and dealer finance professionals.

Dealers claim that this practice actually fosters competition among lenders, and allows dealers to offer consumers the best deal possible on auto financing.

Both Sides Have a Point

So, again, who is right?

Well, they both are – to some extent. Third party financing is a competitive business. Finance companies compete for dealer business by offering dealers the lowest possible rates, and letting the dealer make their best deal with the customer.

If CFPB’s guidelines are followed, dealers would be forced to charge a simple flat fee on top of the buy rate.

CFPB is right that the spread between buy rate and contract rate can be steep, and that people with low incomes and borderline credit – in particular — often pay a lot more for an auto loan than they really need to.

You Need to Empower Yourself

The Bureau is offering these tips:

TIP: Ask the dealer what the buy rate is and offer to pay the buy rate plus a flat fee, rather than paying an interest rate that is above the buy rate. This could save you thousands of dollars over the life of the loan.

TIP: The dealer may offer you a higher interest rate than you can get directly from a bank or credit union. Shop around to find out who offers the best interest rate.

We’ll add one more, and set it off in bold print:

Shop for financing before you set foot in a dealer. Start with your credit union.

You should address financing before anything else, since you need to know what kind of financing you qualify for. Do this before you’re in a pressure situation – such as when you’re at the dealer and your shiny new car is sitting right outside.

Even you’ve already signed on the dotted line, you still have options. Your credit union may be able to refinance your existing auto loan at a lower rate. They do this every day for members who are paying more than their credit-worthiness requires them to pay.

Let Congress and the CFPB duke it out, (and by all means weigh in with your opinion in this matter: write your Congressperson). But don’t feel that you are out of the loop here.

There are things you can do to protect yourself from rip-offs, and get the best rate you deserve on your next auto loan. Start by talking to your credit union. After all, your CU works for you, and is not-for-profit.