CAMBRIDGE WINTER CENTER
for Financial Institutions Policy
Auto Race to the Bottom:
Free Markets and Consumer Protection in Auto Finance
Raj Date and Brian Reed
The Cambridge Winter Center for Financial Institutions Policy is pleased to present this research note in conjunction with its ongoing research program on the post-crisis evolution of U.S. consumer finance.
Over the past several months, the Federal Reserve, Congress, and the Administration have been considering ways to strengthen and rationalize consumer protection in financial services. Central to that debate is the proposed creation of a new agency focused exclusively on this issue, the Consumer Financial Protection Agency (the “CFPA”).
Despite pronounced industry opposition, a consensus appears to be developing among policy-makers that the proliferation of dubiously structured and marketed consumer financial products helped fuel an unsustainable bubble in credit and asset values prior to the financial crisis, and visited widespread distress among households thereafter. Proponents of the CFPA argue that it would help prevent similar problems in the future.
Even among proponents, however, there are varying conceptions of the scope and function of the CFPA. One of the most significant variations is in the treatment of auto finance. Specifically, the CFPA as envisioned by the House Financial Services Committee would exclude auto dealers from the CFPA’s coverage. The Administration’s original proposal would have included them.
This research note does not address the issue of whether the CFPA itself is advisable. Instead, it is meant to inform debate on, assuming there is a CFPA, whether auto dealers should be included in its mandate. In particular, it (a) summarizes the structure of the auto finance industry, and the role of dealers within it; (b) identifies the analytical premises for excluding financial services activities from the CFPA’s scope; (c) evaluates, in light of that analytical framework, whether dealers should be exempted; and (d) highlights the likely competitive implications in the industry if the exemption becomes law.
RESEARCH NOTE: AUTO FINANCE
November 16, 2009
Proposals to exempt auto dealers from a new consumer protection regulator’s mandate are ill conceived. The exemption would be both a step backwards for consumer protection, and deeply offensive to basic free market principles.
