Building and selling cars isn't all that profitable. But writing loans and leases and selling expensive add-ons like extended warranties can be very lucrative -- and can add hundreds or even thousands of dollars to the price of a new vehicle.
With car sales starting to boom after years of desultory sales, the Consumer Financial Protection Bureau is taking a look at whether all these high-priced add-ons are being adequately disclosed to consumers, The Wall Street Journal reports today.
The newspaper says the bureau has issued subpoenas to several large auto lenders seeking information on sales practices, pricing and disclosure.
The add-on products are legal. The question is whether consumers are being properly informed of the cost of the products and the terms of the transaction.
Many consumers complain that they are promised their extended warranty will cost only a few dollars a month while covering nearly anything that could go wrong with their cars, only to learn otherwise when problems occur.
"I was pressured into buying a [AAA] Great Choice plan which they told me would cover everything I needed on my vehicle," said Ronnie of Baltimore in a ConsumerAffairs posting. "Well, after almost a year, I had a problem and nothing was covered. My mechanic told me the claims process in itself was the worst he had ever seen and that this was something called a product warranty which I don't know what that means but my mechanic made it sound like it wasn't a real warranty."
The Justice Department, meanwhile, is probiing auto dealerships that make their own loans to customers with poor credit, charging interest rates that may be much higher than a bank or auto lender would charge. The Journal said Jon Seward, deputy chief of the department's housing and civil enforcement section, made that disclosure at a panel discussion at George Mason University in Fairfax, Va., earlier this week.
In March, the CFPB warned auto lenders about jacking up interest rates for consumers with less-than-stellar credit ratings, a practice that can result in more expensive loans for minorities.
“Consumers should not have to pay more for a car loan simply based on their race,” said CFPB Director Richard Cordray. “[This] bulletin clarifies our authority to pursue auto lenders whose policies harm consumers through unlawful discrimination.”
Consumers could be losing tens of millions of dollars a year because of discriminatory lending, the agency said.
The problem involves what are called "indirect" auto lenders, which often allow the dealer to charge the consumer an interest rate that is higher than the rate the lender gave the dealer -- typically called “dealer markup.”
As a result, markups generate compensation for dealers while frequently giving them the discretion to charge consumers different rates regardless of consumer creditworthiness. Lender policies that provide dealers with this type of discretion increase the risk of pricing disparities among consumers based on race, national origin, and potentially other prohibited bases.
Not so, dealers say
Car dealers are fighting back. The National Automobile Dealers Association (NADA) said it and other industry groups "strongly oppose any form of discrimination in auto lending, and the CFPB guidance appropriately explains that unlawful discrimination has no place in the marketplace.”
“However, it is relying on a theory of discrimination that is based on a statistical analysis of past transactions — not intentional conduct — and the CFPB has not provided any information about how it is conducting its analysis," NADA said in a statement.
“The CFPB has recently advised us that they are investigating certain [parts] of our retail financing practices,” read the filing. “It is possible that this could result in actions against us.”
The dealers group claims consumers often save money when they finance their cars through loans
NADA said that data collected by the Federal Reserve Board and transaction data collected by J.D. Power and Associates demonstrate that consumers who chose the indirect channel vs. direct saved, on average, $635.40 in 2008 and it said that in 2009, the average savings climbed to $779.40, then again to $1,162.20 in 2010.