Since 2006, Andrew Koblenz has been on the frontlines of the National Automobile Dealers Association (NADA)’s efforts to protect franchised new-car dealers from regulatory overreach. And he believes the tide may be turning in the Consumer Financial Protection Bureau (CFPB)’s attack on dealership participation.
Koblenz joined the association in 1999 after serving as a senior attorney for the American Automobile Manufacturers Association. Today, he supervises a staff of six attorneys as the NADA’s executive vice president of legal and regulatory affairs and general counsel. F&I and Showroom went one-on-one with Koblenz to find out where the industry stands in its fight with the CFPB.
F&I: I noticed your degree in political science. Is it possible the man who is protecting the industry from regulatory overreach has political aspirations?
Koblenz: My mother, if she were still alive, would tell you that I aspired to be a U.S. Senator in the third grade. But that aspiration got replaced by a much more realistic one, which was to play third base for the Boston Red Sox. But seriously, I do love debating and advocating on policy matters. I am not as much of a political junkie, which is why my position is more of a policy position than a political position.
F&I: Aside from the CFPB, what else is keeping your team busy these days?
Koblenz: There’s an awful lot of regulatory activity in D.C. that has nothing to do with the consumer credit world, and we play a lot in that. There’s tax. There’s advertising. There’s data security. There’s fuel economy. There’s safety recalls. There’s silica dust and motor vehicle lift issues with the Occupational Safety and Health Administration. There are concerns about leaking underground storage tanks. There are Family Medical Leave Act issues. So there’s no lack of things to do.
Our regulatory affairs group has two functions. First, we advocate on behalf of dealers with the federal regulatory agencies. Then, once it becomes clear what the dealers’ obligations are, we educate dealers about what the rules are, and provide them with the tools that help them maintain compliance.
But let me talk about our regulatory advocacy efforts for a second. It’s different than legislative advocacy because you’re dealing with unelected officials who like to get down into the details. Congress passes broad policy directives, but often leaves the actual operationalization of the laws to the regulatory agencies. So, the old saying, “The devil is in the details,” is frequently true here. And our job is to help the regulatory agencies implement those congressional directives and, in some cases, to stay within those directives.
So our task is to help regulators understand how the world outside of government operates, so when they do their job — write rules to implement the policies that Congress has directed them to implement — they do so in a way that allows markets to operate while providing the best consumer outcomes possible.
F&I: How is working with the CFPB different from working with other regulators?
Koblenz: There’s one major difference: As you know, under Section 1029 of the Dodd-Frank Act, the CFPB has no supervisory, regulatory, enforcement or any other authority over our members who are engaged in originating indirect auto financing. This is in contrast to the FTC (Federal Trade Commission) or the Federal Reserve Board or the IRS — agencies that do have regulatory and/or enforcement authority over our members. But despite this difference, the education process is the same.
F&I: What’s the relationship like between the association and the CFPB?
Koblenz: We have sought out and obtained the ear of the CFPB. They have talked to us and listened to us. We’re educating them about the market and explaining what their proposals, guidance and actions would do or not do, as the case may be.
F&I: Are we winning or losing the battle with the CFPB?
Koblenz: We have had a lot of concerns with the auto financing guidance the CFPB put out in March 2013, and with the pressure the bureau has been exerting on finance sources. Our concerns emanate from the fact that the CFPB’s attempt to address the fair credit concerns it has identified has utilized an approach that we think doesn’t really address those fair credit concerns, and that, additionally, has adverse effects on consumers.
So, in our view, adoption of the CFPB’s approach would fail to advance the ball from a fair credit perspective, and at the same time would move the ball back from a consumer perspective by reducing the amount of discounts that are available to consumers. What the NADA has tried to do is to explain that there is an approach to the vehicle finance market that both addresses the CFPB’s concerns regarding fair credit and preserves the availability of discounts for consumers, which is the hallmark of this highly competitive marketplace. And that approach, of course, is the Fair Credit Compliance Policy & Program we issued in early 2014 along with the National Association of Minority Automobile Dealers and the American International Automobile Dealers Association. We think that program is the solution to the problem the CFPB says it is attempting to address.
F&I: How is dealer adoption of that program?
Koblenz: I think it’s important to note that the program is optional, so it’s not mandatory, and each dealer has to decide whether it’s right for his or her operation. With that said, some of the internal surveys we’ve seen suggest a fairly high level of use within dealerships.
From the perspective of the regulators, we believe this approach, which is based on a 2007 consent order developed by the Justice Department, remains the single best way of addressing fair credit risk and ensuring the preservation of the ability of consumers to get discounts. And we are heartened by the full-throated endorsements the program has received from some of the most respected compliance attorneys in the dealer and lender communities.
I also want to give credit to some of the vendors, including Dealertrack, RouteOne and CU Direct. They have actually gone ahead and automated the program for their customers, which has made it easier for dealers who adopt the program to implement it.
F&I: Let’s talk about Honda Finance’s $24 million Equal Credit Opportunity Act (ECOA) settlement with the CFPB and Department of Justice. Did agreeing to lower its markup cap hurt the industry’s efforts to protect dealer participation?
Koblenz: Well any analysis of the consent order should recognize up front that it affects only non-subvented contracts on vehicles that are financed through America Honda, and doesn’t apply to leases. That means it’s really applicable only to a very, very small part of the auto finance market. That’s important because it means that decisions made by individual market participants can’t be viewed as a microcosm of the market itself or as indicative of where the rest of the market might be headed.
So what the Honda Finance deal does for the small portion of the market that it covers is limit the amount a dealer can discount on a financing offer from American Honda Finance. And when you do that, you invariably limit the amount of money consumers can save.
That said, the settlement really is more evidence that dealer participation is here to stay. What’s really under threat is the degree to which the dealer can offer discounts. And consumers lose in any system where their ability to save is constrained. So dealers and the NADA are fighting to preserve the dealers’ ability to discount because we don’t want to lose the ability to provide savings to meet a consumer’s budget constraint or beat a competing financing offer.
F&I: Several of the public dealer groups have endorsed the deal Honda Finance negotiated. Why do you think that’s so?
Koblenz: I think what you’re seeing from those responses are signs that the tide is actually starting to turn toward the direction we’ve been advocating. But we’re not there yet. Remember, when this all started, the CFPB wanted to eliminate dealer discounting entirely. And that’s why we set out to explain to regulators and to Congress what the real-world negative implications of such an action would be. In doing so, we were able to show that eliminating dealer discounting would result in consumers paying more than they do now for financing while not addressing the potential fair credit risk under the ECOA.
F&I: Let’s talk about the Center for Responsible Lending (CRL) and its 2011 study, which claimed dealer markups cost consumers $26 billion a year. I questioned the study back in 2011, but its findings continued to find their way into the debate over dealer markups. Thankfully, The Washington Post finally caught on and called out the study in a May 5 article by Glenn Kessler.
Koblenz: You should be very proud, because you did call out the flaws early. We believe that the debate over the proper oversight of the vehicle financing marketplace should proceed on good information, a good understanding of how the market works and a good understanding about the data points that exist in that market. If all that happens, then the policy outcome is more likely to be correct as well.
The CRL report’s $26 billion claim was, and continues to be, a completely inaccurate, unsupported point that diverted the debate and stood in the way of regulators reaching a good policy outcome. So when The Washington Post did its deep dive and called this out, that helped the debate move forward toward a better, more informed, more accurate platform. And we’re confident that, on that platform, the policy outcomes will be the right ones.
F&I: The NADA also analyzed the study, correct?
Koblenz: In 2012 we issued a page-by-page, chart-by-chart, assertion-by-assertion analysis of what the CRL claimed. And I know that our effort was way down in the weeds, and it takes a really wonky kind of person to read a 31-page response to a 22-page report. But I think that’s what The Washington Post fact checker did. And if you do go back and read our critique of the CRL paper, you will see that there is not a single chart in the CRL report that is defensible.
So, yes, we have been pointing out to the world that this is a massively flawed document. For a while, it went out of favor. And then it crept back earlier this year when Senator Elizabeth Warren invoked it, saying that the dealer participation model cost Americans $26 billion a year (based on 2009 data), and that that $26 billion should have gone into the pockets of consumers, which means none of it should be paid to the dealers. Not only is she wrong about the number, she’s wrong about the conclusion. Even CFPB Director Richard Cordray has said dealers do good work and deserve to be compensated.
F&I: Let’s talk about H.R. 1737, the bill making its way through Congress that, if passed, would repeal the CFPB’s guidance on dealer participation and add a few more steps to its guidance-writing activities. I know it still has a ways to go, but that 47-10 vote by the House Financial Services Committee had to be viewed as a victory for the industry.
Koblenz: It’s a major success for consumers. The additional significance of that vote is its bipartisan nature. Not only did every Republican on the committee vote for it, but a majority of the Democrats, 13 out of 23, also voted for it.
H.R. 1737 is a good-government bill that says to the CFPB, stay in your lane, make sure you understand the market, listen to the public, listen to the stakeholders — all of them — understand the implications of what you’re doing, understand what your actions do to consumers, and understand what they do to minority-owned businesses, women-owned businesses, and, in fact, all small businesses.
And be transparent. Tell us what you’re basing your analysis on, your conclusions on, and, to the extent you can, what your data shows. And coordinate with other agencies that have shared responsibilities in this marketplace, like the FTC, the FRB and, most importantly, the Department of Justice.
F&I: Talk about the effort the NADA put forth to get 1737 this far.
Koblenz: It may sound simplistic, but this is an education campaign for, in this case, members of Congress. What we’re trying to do is explain what’s at stake and how everything operates. So the main hurdle has been raising the understanding of this complex marketplace to allow for informed decision making.
F&I: Let’s talk about that Charles River Associates study the American Financial Services Association (AFSA) commissioned. In case our readers are unfamiliar with it, the study called into question the methodology used by the CFPB to determine whether minorities are paying higher rates for auto loans than non-minorities. I have to believe the report helped open some eyes in Washington, D.C.
Koblenz: The Charles River analysis, which was very well done, very comprehensive, and very concerning, would have been the kind of public comment the CFPB would have received and considered if H.R. 1737’s requirements were in place when the bureau issued its 2013 guidance.
When the AFSA commissioned the report, it sought to determine whether the CFPB’s method for assessing the presence of disparate impact in an indirect auto lender’s portfolio was producing accurate results. After analyzing the CFPB’s methodology in detail and reviewing 8.2 million finance contracts, it concluded that the CFPB’s method was “conceptually flawed in its application and subject to significant bias and estimation error.” Consequently, industry experts and members of Congress have been asking the CFPB how it corrects for errors in a methodology that it has used, and continues to use, to support its many disparate impact investigations. Regrettably, the CFPB has never provided a clear answer to this question.
Of course, the NADA-NAMAD-AIADA Fair Credit Compliance Policy & Program leapfrogs this entire set of concerns by ensuring that any pricing differential that is found to exist between different groups of customers, whether properly computed or not, is supported by good-faith, legitimate business reasons that are consistent with fair credit laws. So we believe this compliance approach, which is based on a DOJ-developed fair credit risk mitigation model, should offer a lot of appeal to the government as it seeks an industry-wide resolution to this issue.
F&I: So what do you hope to impart to attendees of your presentation?
Koblenz: I have two objectives: I want to provide them with a close-to-the-arena view of what’s going on. I also want to help them make the best decisions they can make as they operate their businesses in this somewhat uncertain time.
Andrew Koblenz will be at Industry Summit 2015 to deliver a keynote address on Thursday, Sept. 10, at 9 a.m. He will take attendees inside the industry's biggest regulatory challenge. For more details, visit www.industrysummit.com.