Statement of Rosemary Shahan

Statement of Rosemary Shahan

President, Consumers for Auto Reliability and Safety

Panel: “F & I Profits: Making Money the Right Way”

Automotive News World Congress

Dearborn, Michigan

Tuesday, January 18, 2005

Thank you so much for inviting me to speak. When Ed Lapham at Automotive News called to invite me to join this panel, I was thrilled. I’m honored to be invited, and wish the vagaries of the flu season hadn’t kept me from appearing in person.

Like many of you, I’ve been reading Automotive News for decades. I felt privileged to get to know Automotive News’Washington, D.C. Bureau reporter Helen Kahn, and will always feel tremendous admiration and affection for her. Helen was a very gifted and feisty journalist, who covered the early days of auto industry regulation with absolute integrity, intellectual curiosity, and brilliance. I hope someday I’ll get to meet Keith Crane, after many years of reading his columns. While I don’t always agree with him, I have always valued the fact that he and the editors of Automotive News are independent, credible voices, and continue to push the industry forward.

I thought what would be most helpful for me to provide today would be something of the consumer’s perspective on auto financing and insurance. In a nutshell, while progress is being made in making auto F & I fairer and more transparent, we’re not there yet.

Some automotive insiders themselves are saying it’s time to get back to selling actual products. They propose cleaning up markups and loan packing, and going to flat rates. I think their advice is wise.

Some indicators reform is needed:

According to the Consumer Federation of America and the National Association of Consumer Agency Administrations, auto sales and service complaints perennially top the list of consumer complaints lodged with state and local government consumer protection agencies. The latest Gallup poll on the public’s esteem (or lack thereof) for various professions shows auto salespersons once again at rock bottom.

In response to a rising tide of complaints from civil rights groups, consumer groups, and individual consumers, there is increasing interest among lawmakers and other policymakers in curbing auto sales abuses.

Last year, California lawmakers voted to enact AB 1839, the Car Buyers Bill of Rights, that would have capped dealer markups at 2.5% for loans up to 60 months or 2% for longer loans, and prohibited loan packing. Lawmakers sent the measure to Governor Schwarzenegger. The auto industry opposed it, and Governor Schwarzenegger vetoed it. This year, the same measure has been re-introduced, as AB 68 (Montañez). An initiative has also been filed in California that will cap dealer compensation at $150 per conditional sales contract, and prohibit loan packing. Other states are likely to take action as well.

Some reasons why legislation is needed to curb dealer kickbacks:

First, let’s agree that for purposes of this discussion about kickbacks, or markups, we’re talking about non-recourse loans, which industry lobbyists concede comprise over 95% of auto loans. These are loans where the lender assumes the risk, and if the payments are not made, the lender has direct recourse against the borrower—they can repossess the vehicle. The dealer is not assuming the risk. So—when I talk about markups, I’m not talking about “buy here/pay here” deals, where the dealer carries the paper. Those are a different matter, and a small percentage of the total auto loan market.

The existing market is anti-competitive. Too often, loans are not placed where consumers can get the best rates, but where dealers get to pocket the largest kickbacks. This harms consumers, responsible lenders, and honest dealers alike.

As the industry itself has observed, any lender that tries to offer flat rates for loans risks having their business dry up. Legislation would create a more level playing field.

In legal actions brought on behalf of African American consumers, dealer markup practices have been shown to have a disparate, discriminatory impact on African American and Latino car buyers.

Even with voluntary caps, consumers are still being subjected to exorbitant markups. Some lenders continue to allow higher markups, violating the voluntary caps. Others have no caps at all.

Many states have established their own caps in response to flagrant abuses, for example capping the amount dealers can charge for “document fees.” Whenever the fees charged bear little or no relationship to the actual service provided, the public is likely to demand legislative action.

Bait and switch financing. While ads tout “0%” financing or other special rates for “qualified” buyers, upon “approved” credit, many people who qualify do not get the promotional rates. They are often misled about their creditworthiness.

“Loan packing:” The proposed legislation in California would require dealers to disclose in writing the actual cost to purchase items that are commonly packed into loans, such as clear coating, fabric protection, window etching, GAP insurance, and extended service contracts. It would also prohibit misrepresenting the cost of those items and claims they are included for free when in fact they cost hundreds or thousands of dollars, over the life of the loan.

The pending legislation has been proposed in response to cases such as the ones brought by the Los Angeles District Attorney’s office, which found that consumers were being charged thousands of dollars for unwanted items, under the pretext they were being offered virtually free, or added only a few dollars per month onto the price of financing a car. For example, one individual was charged $6,037 in hidden fees for “theft etching” that cost the dealership a mere $37.

Education should be part of the solution, but it is not the sole remedy.

Any attempt to educate the public must include popular media. Most people get their information from popular media, predominantly television and newspapers. Yet dealers continue to exert economic pressure in an attempt to censor TV and newspaper coverage aimed at educating consumers about car buying practices. The National Automobile Dealers Association claims that education is the solution. But those claims ring hollow when auto dealers bludgeon responsible journalists and media simply for revealing the truth.

News stories are a necessary educational component for informing the public about why they need to learn more about how to purchase vehicles.

A few examples: when the San Jose Mercury News published a relatively innocuous article with tips for car buyers, 47 new-car dealers in San Jose retaliated by withdrawing approximately $1 million dollars in advertising.

Dealers also withdrew advertising from the Orange County Register, after it published reports about a dealership that had targeted minority car buyers, switching them from purchases to leases, and engaging in other practices that eventually led to its license suspension and loss of the franchise.

Dealers retaliated against KNBC in Los Angeles when it covered the California DMV’s bust of the largest Chevrolet dealership in the state. That law enforcement action resulted in the return of more than $2 million in restitution to thousands of victims, and several employees being found criminally guilty of fraud.

Consumer Reports has published a report about advertiser pressure on the news media, and there was general consensus that auto dealers and manufactures are the worst offenders.

Another reason education is not the sole solution: “Yo-yo” financing is a growing problem nationwide. “Yo-yo” financing occurs when a dealer and a buyer agree on terms, and the consumer drives off in the vehicle. Days or weeks later, the dealer contacts the buyer, claims the buyer didn’t qualify, and pressures the buyer to switch to a higher interest rate and/or larger downpayment through various pressure tactics or outright threats--for example, threatening to report their vehicle as stolen, or to embarrass them with their boss or military command.

According to whistleblowers, one of the first objectives in ‘yo-yo” financing is to get the buyer to surrender their current vehicle, known in the trade as “de-horsing.” Once a consumer is “de-horsed,” they are under enormous pressure to comply with the dealer’s demands. Commonly, the dealer gets the buyer to drive their newly purchased vehicle to the dealership to “sign some more papers.” The dealer claims the traded-in vehicle has already been sold. Then the buyer is told they cannot even drive home in the vehicle they purchased unless they agree to less favorable terms.

The advent of “yo-yo” financing means that even the most sophisticated, savvy consumer can do an excellent job of finding out their credit score, shopping for competitive interest rates, and negotiating a fair deal, but still end up being pressured into accepting a higher rate than they deserve.

Being “upside down”--an economic time bomb:

Currently, more than 30% of new car buyers owe more on their loans than their cars are worth. Cars are rapidly depreciating assets. Cars die long before the exorbitant loans on them are paid off. That “negative equity” leaves consumers “upside down” when they purchase their next vehicle. That indebtedness is then rolled over into the next transaction, digging the consumer deeper and deeper into debt. Many consumers have already rolled over the debt from two or more transactions into their current auto loan. As the industry itself has noted, this is a ticking time bomb.

The increasing burden of consumer debt is driven to a great extent by the market distortions of dealer markups and loan packing.

As you all know, President Bush is advocating for he calls the “ownership society.” Key to his vision is the dream of home ownership. It’s important to remember that the excesses of the auto industry are visited upon other segments of the economy. Dollars spent making ridiculously high monthly car payments are dollars that cannot be spent for education, computers, or home mortgages.

For too many people, exorbitant monthly car payments, and longer loans, stretching 6, 7, and 8 years, have become a barrier to home ownership in America. Too many people are saddled with paying off loans for assets that will depreciate the moment they are driven off the lot, instead of being able to afford an asset that is likely to appreciate, and allow them to build equity and have a measure of financial security for themselves and their families.

For millions of American families, the road to achieving the American dream lies through auto sales reform.

Rosemary Shahan

President

Consumers for Auto Reliability and Safety

926 J Street, Suite 522

Sacramento, CA95814

Phone: 530-759-9440

On the Web:

For more information:

The Hidden Markup of Auto Loans: Consumer Costs of Dealer Kickbacks and Inflated Finance Charges. Report issued by the Consumer Federation of America, in conjunction with the National Council of La Raza and Rainbow/PUSH. January 26, 2004. On the web:

Reports from discriminatory lending cases vs. Nissan Motor Acceptance Corp, General Motors Acceptance Corp., and American Honda Financial Corp. Reports include the top 100 markups in each state, posted at NationalConsumerLawCenter site:

Consumer Federation of America releases report calling for an end to discriminatory lending by PRIMUS, an arm of Ford Motor Credit Corp. December 15, 2004. Based on report filed at NationalConsumerLawCenter: