DETROIT – It’s not a dealer-eat-dealer world out there. Things aren’t that vicious.
But the competition is fierce, with both customers and automakers benefitting from the rivalry, says Forrest McConnell III, chairman of the National Automobile Dealers Assn.
“What do you think is the one thing that makes the auto industry run like a Shelby Cobra?” he asks a gathering of the Automotive Press Assn. here. “One word: competition.”
Dealers battling each other for business drive down retail prices for vehicles, financing and service, says McConnell, a Honda and Acura dealer in Montgomery, AL.
“Our manufacturers benefit from a high return on capital in making vehicles as opposed to the low margin of selling them, because dealers bear the costs and risks of these investments.”
NADA’s defense of the dealership-franchise system comes amid flak from some quarters.
For instance, the Consumer Financial Protection Bureau advocates ending so-called dealer reserve, in which auto retailers typically add a point or two to an auto lender’s wholesale interest rate as compensation for facilitating an indirect car loan. The federal bureau wants flat fees to replace that.
“We work with multiple lenders who compete for the dealers’ business by offering us low financing rates,” McConnell says, noting 80% of car loans involve dealers. “The bottom line is this: dealer-assisted financing provides car buyers with the ability to get a discounted auto rate from the dealer.
“And low rates mean lower car payments. But the government is trying to take away a customer’s right to get that discount.”
NADA’s dispute with the CFPB dates to last year. Congress created the bureau as part of the Dodd-Frank financial reform act. An original proposal called for the CFPB to directly regulate dealers.
NADA fought that, claiming dealers aren’t lenders. The trade group won an exemption. But the victory celebration was short-lived.
As it turns out, the bureau’s regulation of lenders strongly affects dealers, as the dealer-reserve issue has demonstrated. And after the federal bailouts after the financial-industry meltdown of 2008, lenders are loath to challenge government regulators.
“The CFPB started pressuring our lenders to switch to a flat-fee compensation issue,” McConnell says. “They’re wrong.”
He describes what might happen if flat fees were to elbow out the dealer-reserve system:
“Lenders will want to pay higher flats to get business. Not lower interest rates. That would give dealers the incentive to select the lender that offers the highest flat fee. How does that help customers or save them money? It doesn’t.”
NADA is garnering Congressional support for its cause. McConnell says 69 Republicans and 40 Democrats side with the association on the issue and a related one involving the CFPB's allegation that the dealer rate add-ons have led to unintended lending discrimination.
He’s not sure where it will end up. “I don’t have a crystal ball.”
Some skeptics question the credibility of NADA in playing the role of a consumer advocate. Yet, McConnell says the dealer-franchise system “is not just a good deal for us, but for everyone.”
