Last month, I wrote about HR 2309, a bill that would give the Federal Trade Commission broad new powers to regulate automobile dealers. Apparently, my column caught the attention of my good friends at the Center for Responsible Lending (CRL), who took issue with my comments on this bill. Who knew the consumer advocates read the trade rags? Well, the good ones always do.

In any event, there are always two sides to any story and this business always benefits from a little intellectual tug of war. That’s why I’ve invited the CRL’s Josh Frank and Delvin Davis to share the center’s views.

1. HR 2309 provides that the FTC must “consider” adopting rules that would restrict post-sale changes in financing terms.

MB: This proposal is directed at a perceived problem with spot deliveries, and I agree that some unscrupulous dealers may use this time-tested sales technique for nefarious purposes. But done correctly, spot deliveries provide a benefit to all parties. For dealers, it increases the likelihood of a sale. For customers in need of transportation, they can drive off the lot immediately.

Having drafted, or opined on, many a conditional sale agreement, I have some thoughts on how spot delivery transactions should be conducted. First, dealers should keep the customer’s trade until the financing closes. This allows the customer to take back his original vehicle if he does not wish to re-contract in the event the proposed financing doesn’t work out. Second, the dealer should return any deposit, less a reasonable and clearly disclosed fee for excess wear and use of the returned vehicle. Third, all disclosure should be simple, in writing and contractually binding, making it clear that the sale is contingent on the dealer finding a buyer for the paper, and that the customer will be required to return the vehicle if he or she can’t.

Sure, some data indicates that lower-income customers have been victimized by bad dealers. But no one yet has offered data that is, in my view, either objective or recent, and one can’t ignore the fact that many of these buyers have had favorable spot delivery experiences. No reputable dealer will risk his reputation to force a sale that is likely to cost him later; nor is he likely to object to regulating bad actors. But all dealers can be legitimately opposed to overreaching regulation.

JF/DD: First off, thank you for allowing us to share our perspectives on the dealer practices we’re discussing. The CRL recently conducted its own research on dealer reserve compensation, which I invite your readers to check out at

In our view, the practice of yo-yo sales is designed to trap the buyer in a highly vulnerable position after the he or she takes the car home. Just when the consumer is both psychologically and economically invested in the new car, the seller threatens to reclaim the car and withhold the trade-in or down payment unless the buyer agrees to pay a much higher interest rate. That higher rate, in turn, provides for a larger dealer markup.

In fact, our survey found that people who had experienced a yo-yo sale had an interest rate that was 5 percent higher, even after accounting for differences in credit risk. The survey also revealed that yo-yo sales were more common among lower-income buyers. Of those who used dealer financing for their last vehicle purchase, one-in-eight buyers with an income of less than $40,000 and one-in-four with an income of less than $25,000 were victims of yo-yo sales. If consumers knew there was a possibility their terms would substantially increase, few would be so cavalier as to say: “I’ll buy this car now. You can tell me next week what it will cost.”

HR 2309 would give the FTC authority to regulate such practices. Should it pass, the task before the FTC will be to prohibit yo-yo sales while preserving mutually beneficial arrangements, as well as the ability of dealers to use spot-delivery sales when appropriate.

2. HR 2309 provides that the FTC must “consider” adopting rules that would limit the ability of dealers to receive compensation for arranging financing or assigning a credit contract based on the interest rate, the annual percentage rate, or the amount financed.

MB: The installment sale is the original form of consumer finance, and statutes regulating such financing are some of the oldest on the books. Markets for installment paper have been around for decades, and some state laws (Ohio, for instance) recognized the dealer’s right to mark up the customer’s rate as far back as 1949. Using the regulatory environment to limit dealer profits is a solution in search of a problem. The real problem, as I’m sure the CRL will admit, is that consumers lack an understanding of financial products and services.


The idea that consumers are disadvantaged by a dealer’s ability to provide retail rates strikes me as odd. Assignees’ rates are wholesale rates, and the consumer is no more entitled to the wholesale rate than he is to buying tomatoes from the retail market at wholesale cost. And just as you can’t buy your tomatoes directly from the wholesaler, neither can a consumer get credit directly from an assignee — unless they are licensed to make direct loans. But even then, it is unlikely a direct loan will result in a lower rate to the customer. The lender would need to be compensated for its origination efforts that would otherwise be handled by the dealer.

The dealer and customer are also free to negotiate any rate since they are the only parties on the contract. The dealer could sell the paper at a profit or loss, or decide to keep the paper and service it himself. In either case, there is no effect on the retail rate agreed to by the customer. In fact, in the latter example, the dealer would get to keep the entire finance charge, not just the spread.

Indeed, the availability of financing outside of the dealership has improved consumers’ bargaining positions. Because dealers are competing with banks and other lenders for the customer’s business, they need to offer competitive rates and other incentives. While new-car rates tend to cluster, the impact of risk factors on used financing create wider variations, and used-car rates from the dealer are often better than the rates from outside sources. For example, when I purchased an off-lease vehicle, the best rate my bank of 15 years offered was 700 basis points higher than the dealer’s offer. And I’m a very good bank customer with an excellent credit score.

JF/DD: Discretionary dealer markups are a hidden and destructive feature of the auto finance industry, because consumers don’t understand the process and because  they offer dealers an incentive to act against a borrower’s best interest. The CRL’s national survey shows that many car buyers do not understand dealer markups.

In North Carolina, a separate Public Policy Polling survey conducted in two urban counties showed that four-out-of-five respondents were completely unaware of markups. North Carolina’s law provides that the dealer is not obligated to tell the consumer whether the loan was marked up or by how much. The fact that the F&I person’s salary is partly based on markup size and volume creates an incentive to steer a borrower into the most expensive loan possible.

We’ve seen the disastrous results of this compensation structure in the mortgage context. Mortgage brokers receive a yield spread premium from the lender for selling loans with higher rates or fees, and terms that are unfavorable to the borrower. This perverse incentive is what contributed to the current foreclosure crisis.

Our research shows that dealer markups add an average $642 to the cost of each vehicle. Prior research by Mark Cohen of Vanderbilt University on five major captive auto lenders reports an average markup of $989 per vehicle.

The CRL’s survey indicates that nearly half of the buyers did not negotiate the credit price because they trusted the dealer to give them a good rate. These buyers paid a steep price for that trust, a 2 percent “trust tax” on the price of credit. In an especially troubling wrinkle, prior research suggests 54.6 percent of African Americans were upsold versus 30.6 percent of whites, and the additional charges to African Americans were about $427 greater than their white counterparts.

While Michael’s analogy to grocery shopping seems intuitive, auto loan rates are unlike wholesale grocery prices in a number of ways. The first is that consumers who are told a dealer is going to shop for their loan typically assume the dealer is giving them the best rate. The second is that the complexity of loan qualification combined with the process of selecting and negotiating a vehicle price, which makes comparing loan prices through dealers unrealistic. And finally, inflating the price of tomatoes never brought down the financial system. Inflated loan prices do have that potential.

We believe that a fair system is one in which charges associated with the loan are transparent and easily understood. The dealer markup provides strong incentives to use coercive practices like yo-yo sales to obtain larger short-term gains. For that reason, we strongly endorse a system in which customers know the costs upfront, as this will provide consumers with more confidence in the deal. That’s a system that benefits everyone.

Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He is a frequent speaker and writer on a variety of consumer credit topics. He can be reached at [email protected]. Nothing in this article is intended to be legal advice and should not be taken as such. All legal questions should be addressed to competent counsel.