LUTHERVILLE, Md. -Auto manufacturers' aggressive financing rates and rebates may be appealing to consumers, but they have credit unions up in arms over allegations of anti-competitive dealer practices. What has credit unions stirred up is their charge that dealers' zero percent financing offers are misrepresenting to consumers the hidden costs involved with the auto sale. CUs further contend that the dealers are not being held to the same Truth In Lending Act stipulations as credit unions and other financials. "The whole basis of Truth In Lending is being tossed away when it comes to auto financing. Consumers are being tricked by the auto dealers," said Rob Windsor, president/CEO, First Financial of Maryland FCU in Lutherville. Indeed, an article in the October 8 issue of Automotive News, "0% financing brings back buyers," touted the financing deals as "a powerful marketing tool," and one "which began as a simple General Motors incentive has created a chain reaction among automakers and a sales revival at dealerships." According to the article by staff reporters Donna Harris and Jim Henry, "the annualized new-vehicle sales jumped from a drooping 15.8 million units right after the Sept. 11 attacks to a 16.4 million unit rate as the month ended." "The Truth In Lending Act was intended by Congress for consumers to use so they could make apples to apples comparisons of financing offers from different financials and see how they differ. If Truth in Lending was good for consumers then, why not now when it comes to auto dealers?" asks Windsor. First Financial of Maryland's auto loan portfolio makes up about $51 million of the CU's total loan portfolio, and of that about 60% are for new car loans. The $282 million FCU has its own indirect lending program and relationships with five dealerships. Asked if his position on Truth In Lending and the credit union's loss of auto loans to the dealers wasn't merely a case of crying over spilled milk, Windsor emphatically answered, "No. Our members believe and trust the people they're buying a car from are giving them the best rate. But they're being misled by the dealers' financing offers," said Windsor. It's not what they're being told, but what they're not being informed about 0% financing and dealers' rebate offers that concerns Windsor. "I'm concerned over our members going in to buy a new vehicle and they're informed by the dealership of 0% financing. Even if the dealer tells the member the credit union offers 5% financing, the member thinks they're making an apples to apples comparison and they'll choose the dealer financing. In truth, they're not making an equal comparison." Mark Starr, president/CEO of Florida CU in Gainesville also doesn't understand how – or why – dealers are able to skirt Truth and Lending. He emphasized that, "The issue isn't direct versus indirect lending, it's about Truth in Lending." Florida CU, like First Financial of Maryland CU, has its own indirect lending program. The $136 million CU has about 50% of its loan portfolio in auto loans and most of that is from used cars. Starr said his new car loan business has dried up since September 11′s events and the car companies' new financing/rebate deals. "There is no such thing as Truth In Lending in dealer financing as it pertains to captive financing," said Starr. Starr, like Windsor, argued that Reg Z is not being enforced equally. "With any other type of consumer loan, if a credit union bought down a loan for say $1,500 then according to Reg Z the credit union would have to figure that into the annual percentage rate," he said. "Auto dealerships should be held to the same regulation." Auto dealers' aggressive financing deals haven't gone unnoticed by the trade associations. In a letter to the editor written to USA Today, CUNA President/CEO Dan Mica warned consumers to be aware of hidden costs in auto finance companies' low-rate financing deals being offered now (see related story page 6). Credit Union Direct Lending (CUDL) issued its own advisory to credit unions on what they can do to effectively deal with the aggressive financing rates and cash incentive programs being offered by the auto manufacturers to generate auto-buying activity. CUDL advised CUs that, "The facts are that auto-buying is in a downward trend; manufacturers cannot sustain this type financing for long periods of time. These particular manufacturer programs are short-lived." In fact, Chrysler's program ended October 1. Ford Motor Co.'s program ends October 31, and the GM program ends Jan. 15, 2001. In the meantime, CUDL recommends credit unions educate their members about taking advantage of the cash incentives associated with these programs to apply to their vehicle purchase with credit union financing. In many cases, says CUDL, a member's overall monthly payment will be very similar if not lower to the payment they'd otherwise be making if they used a manufacturer's 0% financing deal. Starr wants CUNA to go a step further. In a letter to CUNA Chairman David Maus, Starr wrote that the association "has the opportunity to do something that will significantly benefit credit unions' bottom line. They need to end the indirect exemption that the car finance companies have in quoting below market finance rates." He stated that the action would also benefit consumers. Starr recommended CUNA take the following approaches: * Pursue a Real Estate Settlement Procedures type of act for car financing. The act, which prohibits realtors from making any profit off of the financing, was passed by Congress to protect consumers from unethical charges on mortgage loans and to create a more open market for mortgage loans. The same problems exist in car financing, wrote Starr. In the case of near or 0% financing, the manufacturer is subsidizing the rate to allow it to be bought down, he wrote. This practice is not allowed under Reg Z for all other loans from a disclosure standpoint. * Pursue legislation to force all rebates and manufacturer subsidies to be included as prepaid finance charges as is required for all other loans. This would be consistent with Truth In Lending regulations in place for all other types of consumer lending. Maus passed Starr's letter on to CUNA's Consumer Protection Subcommittee, chaired by Kris Meecham, president/CEO, Deseret First CU in Salt Lake City. Meecham told Credit Union Times he had reviewed the letter and that "some of Starr's concerns are valid." At press time, Meecham said the subcommittee planned to meet on October 19 to review the issue and look at claims auto manufacturers are making and determine if there are any undisclosed fees. "Any place we see violations we will point them out to CUNA's Governmental Affairs Committee and recommend swift remedies," said Meecham. This might prove easier said than done. Several years ago, CUNA attempted to address the problem of anti-competitive dealer practices when car manufacturers offered zero percent financing. CUNA went so far as considering the possibility of suing one or more of the dealers' financial subsidiaries. As Maus explained in his response letter to Starr, based on the advice CUNA received from outside counsel, it didn't pursue that course of action. CUNA did, though, go to Congress, the Consumer Federation of America, the Federal Reserve Board, and the Federal Trade Commission. CUNA even filed a petition with the FTC to seek review of auto dealer financing practices. In the past, the groups have felt there are no competitive problems. The Fed and FTC have further indicated there are no Truth In Lending concerns or violations and that consumers are not disadvantaged by the practices. Meecham is not deterred by this. "The purpose of Reg Z is to protect consumers from deceptive advertising. If it appears the auto manufacturers' financing incentives could be an avenue for deceptive advertising being used to bait consumers, then we expect regulators to regulate them with the same degree of efficiency and justice they would do for any other creditor," he said. CUNA's Associate General Counsel for Regulatory Advocacy Mary Dunn said CUNA also wants to see if there is a new approach it can take "that wasn't in the mix before to deal with the issue." NAFCU Economist Jeff Taylor agrees that auto manufacturers' aggressive financing offers are a powerful lure for consumers. "It's a way for the manufacturers to get customers in the dealers' door, it sounds very sexy when you first hear about it," he said. In fact, the Automotive News article reads that, "Though an informal survey of 10 dealerships suggests only half the customers qualify for the no-interest programs, the gimmick is getting people in the door." Some credit unions might lose a limited share of the new auto loan market to the dealerships, but Taylor opines that as far as the auto manufacturers' aggressive pricing incentives go, "the sustainability is not there. Their margin is already pressed, so they can't keep this up indefinitely. It's a way for them to clear inventory rather than being a sustainable strategy." "It's all a market share game," said CUNA Chief Economist Bill Hampel, who emphasized that even before September 11′s terrorist attacks, credit unions' new auto lending was sluggish and the captive finance companies were offering special deals. Car manufacturers were pushing low rate programs hard, but not as hard as the zero percent financing deals they're marketing now. According to Hampel, from December 2000-July 2001, used car loans increased from 19.9% to 25% of loans outstanding for CUs; new car loans dropped from 20.1% to 19.4% of loans outstanding. Hampel calculated that for a 60-month loan where the rebate is 10% of the price of the vehicle, the break even loan rate for credit unions would be 4.5%. For a credit union car loan at 7.5%, the break even rebate rate for the auto manufacturer would have to be 12-13%. Hampel said there are still many things credit unions can do to respond to the auto manufacturers' pricing strategies that can help minimize the effect on CUs' loan portfolios. For one thing, he said "Credit unions are going to have to aggressively market to their members and educate them to check the manufacturer's rebate and come to the credit union first before they go to the dealership to buy their car." He also said credit unions will have to redouble their efforts on securing used car loans. In a worst case scenario, Hampel said the zero percent financing deals could stop credit unions' new car buying loans completely. He highly doubts this will happen. Even if it does, said Hampel, and if all credit union loans outstanding held their own, credit union loans would only shrink just under 1% a month. "Credit unions' loan portfolios are more diversified now than they used to be," said Hampel, "One in five dollars of credit union loans outstanding are in new car loans. That means the remaining 80% of loans are in other products, and that provides a cushion." Hampel predicted credit union loan growth will stagnate for a few months and then pick up slightly. [email protected]