Thomas B. Hudson

Thomas B. Hudson

A recent quote from Sen. Elizabeth Warren (D-Mass.) got a lot of attention from the auto dealer community, and for good reason. Here’s what she said: “One study estimates that these auto dealer markups cost consumers $26 billion a year. Auto dealers got a specific exemption from CFPB oversight, and it is no coincidence that auto loans are now the most troubled consumer financial product. Congress should give the CFPB the authority it needs to supervise car loans — and keep that $26 billion a year in the pockets of consumers where it belongs.”

That statement was the subject of an article by Glenn Kessler, the fact-checking investigator at The Washington Post. He gave the statement a grade of “Four Pinocchios” for Warren’s “false claim that auto dealer markups cost consumers $26 billion a year.” A “Four Pinocchio” rating is the Post’s worst rating, awarded for “erroneous claims by political candidates, interest groups and the media.”

Warren’s claim was taken from the widely criticized findings of an April 2011 “report” by the Center for Responsible Lending. That study, frequently and accurately debunked by the National Automobile Dealers Association (NADA), also claimed, among many other inaccurate findings, that the average dealer participation earned in subprime finance contracts is 5.04%; the contractual caps on what dealers can earn on such deals are usually well below that amount. Despite the questionable scholarship evidenced by the study, it has been cited over and over again by politicians and their aides, the media and others.

It’s refreshing to see the Post, not exactly a fan of the consumer financing industry, call Sen. Warren out on her statement. The article was an excellent effort, reflecting the sort of probing and questioning that reporters seldom seem to bring to the claims of consumer advocates.

Kessler could have added, by the way, that even the CFPB has conceded that dealers are entitled to compensation for their role in the auto financing process. Although there is an argument about what constitutes fair compensation for dealers, the aggregate amount of such compensation would be quite a big number. He also could have pointed out that Sen. Warren offered not one whit of evidence that subjecting car dealers to CFPB oversight, instead of the oversight of the Federal Trade Commission, as is now the case, would make any difference in enforcement efforts.

Finally, he could have pointed out that Sen. Warren offered no support whatever for her laughable statement that “auto loans are now the most troubled consumer financial product.” If there is any truth to her proposition, Kessler should point out, Sen. Warren should be blasting the FTC for its lack of oversight and enforcement.

And as a final quibble, you should note that Kessler, like most journalists, mischaracterizes the auto finance process as it operates at dealerships. Dealers do not make loans. They engage in credit sale transactions.

Before you snidely say something about “mere semantics,” consider that loans and credit sale transactions are almost always governed by different laws, including those related to maximum finance charge caps and disclosures. More importantly, in a credit sale transaction, the dealership is the initial creditor, extending credit by the act of exchanging a car for a contract containing the buyer’s promise to pay for the car over time. The dealership, by the way, could keep the credit contract and collect payments (including the full finance charge, not just some “participation” in part of it) directly from the buyer, if it wished.

Most dealers prefer liquidity, and do not want to hold and service these contracts, so they sell the contracts to finance companies, banks, and credit unions (not as “brokers,” as Kessler characterizes them, but as primary parties in the credit sale to the car buyer). Other dealers do keep their credit contracts. They are called buy-here, pay-here dealers, and most dealers who keep their contracts are not exempt from the CFPB’s jurisdiction.

The role of dealerships in auto finance is accurately described in a publication called “Understanding Vehicle Finance,” a consumer education publication produced jointly by the American Financial Services Association (AFSA) and the NADA, in cooperation with the FTC. This pamphlet should be a “must read” for any reporter writing about auto financing. I’m sending Kessler a copy.

So, good work, Mr. Kessler. I was tempted to give you half a Pinocchio for not calling Sen. Warren out on her other claims and for not correctly describing the business you are writing about, but you did such a thorough job on the $26 billion claim that I decided to give you a pass.

About the author
Tom Hudson

Tom Hudson


Thomas B. Hudson Esq. was a founding partner of Hudson Cook LLP and is now of counsel in the firm’s Maryland office. He is the CEO of LLC and a frequent speaker and writer on a variety of consumer credit topics.

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