In a speech at the Levy Economics Institute in April this year, Elizabeth Warren, the Democratic senator from Massachusetts, made a claim that because car dealers were exempted from Consumer Financial Protection Bureau oversight, dealer markups are costing consumers $26 billion a year. She said:
One study estimates that these auto dealer markups cost consumers $26 billion a year. Auto dealers got a specific exemption from CFPB [Consumer Financial Protection Bureau] 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 sounds like a tremendous of money, and thanks to their many shady practices, car dealers are an easy group to malign. The particular statistic she quoted sounded a little fishy, though, so the Washington Post dug a little deeper into her claim. As it turns out, her claim is at best a gross misrepresentation of the data.
The statistic Warren cited originally came from a 2011 report by the Center for Responsible Lending, a nonprofit organization that claims to be nonpartisan in its fight against “predatory lending practices.” While the CRL doesn’t disclose exactly how it came to its conclusion, the report is based on data from 2009 using information from a yearly survey published by the National Automotive Finance Association. NAF is a membership organization of lenders who specialize in sub-prime loans.
That means that while Warren’s claims may initially sound like they’re referring to the prices of the cars themselves, she’s actually talking about the interest rates from loans arranged through dealerships. Car buyers are able to pre-arrange loans with banks and credit unions on their own; if dealerships arrange the financing, they usually charge a certain percentage over the base interest rate for doing so. Not only is Warren taking issue with what essentially works out to the fee dealers charge to broker a loan for the customer, she’s basing her claim off a survey of subprime lenders in 2009 at the height of the financial crisis and applying it to the entire auto loan market.
Contrary to the CRL’s characterization, subprime loans were only one-fifth of the auto loan market in 2009. Additionally, while there were 175 companies in the subprime market at the time, only 25 of them participated in the survey. Ten of those 25 companies were considered minor players and had fewer than 10,000 accounts, while only one company was large enough to be one of the 20 largest lending companies in the country. That means fewer than 15% of lenders in the subprime market were included in the survey, and 40% of that 15% were small companies. To say the study doesn’t accurately represent the entire auto loan market would be a serious understatement.
“The [NAF] report has never purported to represent the entire auto financing industry,” said Jack Tracey, the group’s executive director. “The 2010 survey reported data from only 25 companies, all in the non-prime financing space, and it would be incorrect to extrapolate such a small sample size to the entire auto financing market.”
The CRL knows it as well, with Chris Kukla, the group’s senior vice president, saying: “One thing I will say is that the amount of publicly available data is minimal. We would be the first to admit that it is not a perfect data set.”
When the Washington Post looked further into the NAF survey, it found that the numbers cited in the CRL report varied wildly. The average markup on a used car loan, for example, was $280 in the NAF survey but somehow jumped up to $780 in the CRL report. The differences were in other statistics as well. Calculating the numbers on the NAF survey shows a total dealer loan markup of around $11.6 billion, less than half the number quoted in the CRL report and by Warren. It’s data based on a small segment of the auto industry, is focused on data from the height of the financial crisis, and is almost entirely meaningless.
Other figures, calculations, and claims get more confusing from there, but, ultimately, looking deeper into the CRL report that Warren used to make her claim is irrelevant to the auto loan industry as a whole. Even if it were, can car dealers really be expected to do work for free? If a customer doesn’t take the opportunity to arrange financing through a bank or credit union before shopping for a car and instead expects the dealer to provide that service, is it really unfair for the dealer to charge that customer for providing the service?
Interestingly, of the 25 companies in the NAF survey, only 15 of them worked with auto dealers to arrange loans, and 10 of them said that dealer reserve was a flat fee, not an additional markup of the interest rate. That’s exactly the practice that Warren and other are advocating for. Even if the findings in the CRL report were accurate, a business charging a fee to provide a service as a convenience to customers in not inherently wrong, nor is it taking money out of the pockets of consumers. If car buyers don’t want to pay a dealer to arrange financing for them, they’re perfectly capable of doing that themselves.
Warren may not have been intentionally lying, but at the very best, she was making statements on a subject she didn’t understand and using statistics she didn’t have fact-checked. Using statistics is important when it comes to advocating policy changes, but making sure those statistics are representative of more than just a subset of a subset is important too. It’s even more important to accurately characterize those statistics so as not to mislead the public.
Maybe auto dealers should be included under Consumer Financial Protection Bureau oversight, and maybe the markups they’re applying to auto loans are too high. That’s neither here nor there. Considering all the unsavory things that dealers are actually guilty of doing, though, complaining that they charge a fee to arrange financing is a waste of time. Warren owes it to her constituents to be better than this.