CUNA Comment Letter

Disclosure of Automobile Financing Under Regulation Z, the Truth in Lending Act

December 12, 2001

Governor Edward M. Gramlich
Federal Reserve Board
20th Street and Constitution Avenue, NW
Washington, DC 20551

Dear Governor Gramlich:

The Credit Union National Association (CUNA) submitted a letter to the Federal Reserve Board’s (Fed’s) Consumer Advisory Council on October 24, 2001 offering a number of suggestions for possible revisions to Regulation Z, the Truth in Lending Act (TILA). This letter provides additional information regarding the issue of additional disclosures that should be provided under Regulation Z when automobile dealers offer below market rate financing. CUNA represents more than 90 percent of our nation’s 10,500 state and federal credit unions.

The need for appropriate disclosures when automobile finance companies offer automobile loans with annual percentage rates (APRs) at or near 0% is a very timely issue for credit unions. Although the current offers by the automobile industry are scheduled to end next month, we are concerned that these offers will be extended again. We are also concerned that the success of the current financing programs will result in similar programs being offered more frequently in the future whenever the industry has a need to reduce inventory. Although we realize that both the CAC and the Fed have exhaustively reviewed this issue in the past, we believe that it is now important to revisit the issue in light of a recent court decision in this area.

Credit unions want their members to choose the best financing option when purchasing an automobile. However, credit unions want their members to receive all the information necessary in order to decide if the financing offered by the automobile dealership is truly the best option for them. We believe the Fed

can assist in this effort by amending the Regulation Z requirements to require disclosures that would provide consumers with useful information in connection with the below market rate financing that is periodically offered by the automobile industry. This will further the goal of TILA by providing consumers with meaningful comparisons of interest rates so that they can make informed credit decisions.

When automobile finance companies offer APRs at or near 0%, it is clear that this financing is being offered at a rate that is below the market rate and is also below the companies’ cost of funds. The difference between the APR and the cost of funds can be determined by reviewing the financial statements of these companies, which are publicly available.

It is unrealistic for consumers to expect that they are actually borrowing money below the cost of funds. Consumers can generally negotiate a lower price for the automobile if he or she foregoes the low APR. The difference between these two prices must be disclosed as a prepaid finance charge under Regulation Z and reflected in the APR. This difference is often reflected in a rebate that the consumer may elect in lieu of the low APR. Here, the consumer is paying for the low APR by foregoing the rebate, which we believe is a prepaid finance charge that needs to be disclosed under Regulation Z.

Our position with regard to rebates has recently been confirmed by the United States District Court for the Northern District of Illinois. In Coelho v. Park Ridge Oldsmobile, Inc., et al., the automobile dealership offered Mr. Coelho either a $1500 rebate or below market rate financing for the purchase of a sport utility vehicle. The court agreed with Mr. Coelho’s claim that the policy of selling cars to other customers for $1500 less than what is charged to those who choose low rate financing constitutes a finance charge that needs to be disclosed under TILA. A copy of the case is attached to this letter.

Even when rebates are not available, we believe that there is a method to determine the additional prepaid finance charge that should be disclosed when a consumer elects a low APR. Automobile finance companies are compensated when low APR loans are offered to the public. It is our understanding that for each transaction, these companies generally receive a payment from the automobile manufacturer to cover the difference between the low APR and the APR that is offered in the absence of these special financing programs. A portion of this payment is often recouped from the individual dealers.

We believe that this payment is an accurate measurement of the additional amount that should be included as a prepaid finance charge. The automobile finance company will always receive this payment or compensation in some form, either from consumers when they borrow at times when low APR financing is not offered or from the manufacturer when this special financing is offered. Either way, the consumer is paying this amount, either directly when low APR financing is not offered or by paying a higher price for the automobile to compensate the manufacturer for the payments it makes to the automobile finance company under these special financing programs. These payments from the manufacturer should be considered a prepaid finance charge and disclosed as required under Regulation Z.

Alternatively, we believe that a relatively simple disclosure requirement should be included in Regulation Z to reflect that purchasers may be paying a higher price for the automobile if they decide to accept below market rate financing. This disclosure would only be required of lenders offering such programs. CUNA will be pleased to assist the Fed in this effort to provide a simple, but meaningful disclosure.

Thank you for the opportunity to bring this matter to your attention. If you or your staff want to discuss this matter further, please give me, CUNA General Counsel Eric Richard or Associate General Counsel Mary Dunn a call at (202) 638-5777.


Daniel A. Mica
CUNA President and CEO

cc: Jane Ahrens, Esq.