Auto dealers and lenders have had quite a party over the last two years as sky-high demand prompted record levels of sales activity and drove up prices.
But now comes the hangover, as federal and state regulators put more scrutiny on their practices, clamping down on some companies and seeking to impose major changes that are expected to reshape the industry for years to come.
The auto finance industry is facing regulatory pressure on several fronts, with the Consumer Financial Protection Bureau, the Federal Trade Commission and various state regulators all taking action. The scrutiny is wide-ranging, covering pricing discrimination, "add-on" products that make cars more expensive and lenders' handling of car repossessions.
The agencies' renewed focus on the sector is drawing praise from consumer advocates, who say that shoddy practices at dealers and lenders have long needed stronger policing. But the industry is pushing back, arguing that the regulators' more aggressive approach could impede consumers' access to car purchases.
"The vehicle finance industry is highly competitive, and consumers have many choices when it comes to financing their vehicles," Celia Winslow, senior vice president at the American Financial Services Association, said in an emailed statement. "Because of the industry's ability to price for risk, consumers can get the loans they need to get the vehicles they want."
Though industry lawyers say scrutiny of the sector is normally high, they also acknowledge that their clients are getting more questions from regulators, and more issues are being flagged for formal enforcement actions.
"There's just a whole lot of activity going on from all quarters of the regulatory front in auto finance right now," said Chris Willis, a lawyer at Troutman Pepper who advises banks and other consumer lenders.
The industry is facing "more collaboration and communication" across the various agencies responsible for overseeing the auto industry, said Jody Porter, a partner at the law firm Nelson Mullins. "We expect to see that continued coordination throughout 2023."
In one closely watched case, the CFPB and New York state attorney general
A major area of concern for regulators is discriminatory pricing. The scrutiny is similar to the CFPB's
Today, other agencies are pursuing similar cases. The FTC, which regulates auto dealers, reached a $3.3 million settlement with a Washington, D.C.-area dealership that it says charged Black and Latino customers higher financing costs than white ones.
The FTC and the state of Illinois also settled a similar dealer-focused case in April for $10 million. Other state agencies taking action against dealers or lenders include the
And in December, a top fair lending official at the Federal Deposit Insurance Corp. said during a webinar that the agency has recently referred some auto cases to the Department of Justice for potential violations of fair lending laws.
Regulators are also scrutinizing so-called add-on products, such as extended warranties, dealership service contracts and guaranteed asset protection, or GAP, products. GAP products can help consumers whose cars are stolen or damaged, since the product covers the "gap" between what insurance companies pay for the vehicle and the remainder of an auto loan.
Last year,
In a $3.7 billion
The FTC is also focusing on add-on products under
The proposed rule has drawn heavy criticism from the industry, with the National Automobile Dealers Association calling it "ill-conceived, ill-supported, ill-coordinated, untested, and unlawful."
The auto dealers' trade group
The FTC rule targets add-on products that the agency says are applied in a "deceptive" manner, noting that the "paperwork-heavy vehicle-buying process can make it difficult" for consumers to spot add-on charges. Other add-on products include emergency road services, theft protection devices and vehicle undercoating.
The FTC's proposed rule prohibits add-on products that are "fraudulent," such as rustproofing services that don't work or GAP insurance products that exclude the car owner from the service. It also would bar dealers from charging for add-on products without getting explicit consent from buyers, and would require dealers to post their add-on charges at the dealership.
Reforms are necessary in light of "aggressive car sales tactics," which became more visible due to auto shortages during the pandemic, giving dealers a bigger advantage in bargaining, said Erin Witte, director of consumer protection at the Consumer Federation of America. She said some car dealers lead consumers to believe that add-ons — including for more cosmetic products like rims — aren't optional.
"There's really no question that auto-related issues plague consumers nationwide, and that this increased action and scrutiny by these enforcement agencies is warranted," Witte said, noting that auto sales and repairs topped the group's
NADA, the dealer trade group, said the FTC failed to gather data showing "widespread misconduct that requires or justifies this action," despite comments from agency officials saying they were seeking such data. Only three of the agency's 37 enforcement actions against dealers over the last 10 years have involved add-on products, the group noted.
Similarly, the American Financial Services Association said lenders' GAP insurance "can be a very useful product that can save consumers a significant amount of money." The group pointed to a recent
Despite its focus on dealers, the FTC rule also has implications for auto lenders, which often partner with dealerships by buying their loans under "indirect financing."
The proposed rule would require dealers to maintain a broad array of records to demonstrate their compliance. Lawyers view that requirement as a way for regulators to force lenders indirectly to monitor the records and keep better track of dealers so that bad actors get weeded out.
"The rule itself does not say that, but my suspicion is that that may evolve," said Willis, the Troutman Pepper lawyer.
That aim would line up with an FTC action last year, which
The CFPB, meanwhile, is looking to bolster its own record-keeping on the auto finance sector. In November, the agency
The CFPB has also sent warnings to lenders about their repossession practices, just as increased strains on consumer finances lead to more
In a compliance bulletin last year, the agency
"No American ever wants to wake up to see their car stolen," CFPB Director Rohit Chopra said at the time. "Auto loan servicers need to ensure that every repossession is lawful."
Winslow, the AFSA official, said that repossessions are "always a last resort" and that lenders lose several thousand dollars when they repossess a car.