AUTOMOBILE MARKETING PRACTICES FINANCE AND INSURANCE MONDAY, MARCH 18, 1957 UNITED STATES SENATE, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, Washington, D. C. The subcommittee met at 10 a. m., in room G-16, the Capitol, Washington, D. C., Senator A. S. Mike Monroney (chairman) presiding. Senator MONRONEY. The Subcommittee on Automobile Marketing will be in session. The record will show that Senator Payne, of Maine, and Senator Monroney, are present. Senator Thurmond would be here but for the fact that he has a conflict with another subcommittee of which he is chairman, and cannot possibly be present today. He is very interested in the study of this subcommittee in this current matter, and will be present at every opportunity that his other subcommittee, of which he is chairman, will permit. I would like to make an opening statement, a brief one. During the 2 years of this subcommittee's existence many, many changes have taken place in this tremendous business, both in the relationship between automobile manufacturers and their dealers and in the relationship between the automobile dealers and the public. For, after all, the automobile business is pretty well summed up by Alfred P. Sloan's famous illustration of the three-legged stool. One leg represents the manufacturers and their employees, one leg represents the dealers, and one leg represents the public. If any of these legs is out of kilter then the stool is just no good. They must have a balanced and stable relationship with one another. And the most important leg is the one marked "public." After all, under our freeenterprise system no industry and no person can long survive if the public is not properly served by that industry or that person. Last year we held extensive hearings on factory-dealer relationships. With much help from the elements of the industry itself—that is, manufacturers, dealers, and the public-the subcommittee was instrumental in bringing to public attention many abusive sales practices. It was freely admitted that many of these destructive sales tactics were practiced by the fringe of the industry, and that while only a small percentage of the trade engaged in gyp methods, phony advertising, packed prices, and misleading offers, these things had a demoralizing effect on the automobile industry as a whole. From almost all quarters reports are coming in that there has been established a new climate of better relationships between factory and dealer. Vastly improved business ethics and truth in advertising have eliminated many of the old abuses. It has been the quick and voluntary action of the entire industry that has achieved most of the reforms. To paraphrase President Woodrow Wilson, better service can often be accomplished by legislative committees through calling abuses to the attention of the public than by the passage of legislation. During last year's hearings, several dealer witnesses and others expressed concern over bad practices in the automobile financing field. Such practices tend to put the legitimate automobile dealer and his customer at a serious disadvantage. The chain of finance runs throughout the marketing of cars, virtually from the time the car reaches the end of the assembly line until it reaches the junk heap, and all three elements of the business—the manufacturer, the dealer, and the public-depend heavily upon this chain. The growth of the installment finance business in the United States has astounded the rest of the world. But it has done much to increase the productivity of our country and on major consumer goods it has become an essential and integral part of the retailing business. There can be no doubt of its value, and that is why every effort must be made to insure its integrity and stability. I think I am safe in saying that without an adequate and effective program of installment financing, the automobile industry would not have grown to be the Nation's and the world's No. 1 industry. It has made it possible to put cars into nearly 3 out of every 4 homes and to make the American workman the owner of the best transportation in the world. Growth in the automobile financing field has been tremendous. In January 1955 total retail automobile credit outstanding was established by the Federal Reserve Board to be $10.4 billion. Twenty-three months later, in November 1956, it had skyrocketed to $14.4 billion, an increase of almost 40 percent. Furthermore, this is nearly half of the total outstanding installment credit. The amazing thing is that this happened in the face of the hard money policies designed to prevent credit expansion. During this period of 40 percent increase there have been 6 boosts in the rediscount rate. Of this $142 billion in outstanding automobile paper, about 50 percent is held by automobile sales finance companies, 39 percent by commercial banks, about 6 percent by other financial institutions, and about 4 percent by automobile dealers. Regarding the growth of the leading automobile finance companies, it is interesting to note that their total assets have increased tremendously since 1945. In the 10-year period, 1945 through 1954, some of the largest companies show growth as follows: These happen to be the Big Four of the automobile financing field, and the committee also has figures on the increases in the others. As regards net income on net worth, it is significant to note that since 1949, CIT Financial Corp. has netted not less than 24.7 percent before taxes and in 1954 made 38.1 percent before taxes. During the same period Commercial Credit has netted not less than 25.4 percent before taxes and in 1953 it made 35 percent on net worth. Associates Investment Co., on the same basis, has netted between 28.7 percent and 36.5 percent. General Motors Acceptance Corp. netted 40.1 percent in 1956. Their profits after taxes approximate about half of the above figures. The growth of these and any other companies is welcomed. We are certainly not opposed to profits because that is the American way. Growth and profits reflect the vitality of our great free enterprise system. However, the impact of the cost of financing upon the millions of automobile buyers, who must pay the finance charges, adds to his transportation cost to a significant degree. Complaints have been repeatedly made that some elements of the financing industry have added so much in costs that the mass sales of automobiles have been seriously retarded instead of encouraged. Certainly proper and legitimate finance charges are necessary, but extraordinary charges packs, hidden insurance package deals, pyramiding of duplicated insurance coverage, and other unnecessary charges tend to discourage the automobile buyer and unnecessarily force the postponement of the buying of a new car. Included in the complaints the committee has received are charges of excessive refinancing costs where "balloon" notes are used; extraordinary penalties for prepayment of car notes, and many other questionable practices. Admittedly, not all of the companies engaged in automobile financing resort to such tactics but the impact upon the automobile industry of even a small percentage of such cases is destructive of good industry trade practices. Parallel to automobile financing, and partly because of it, the insuring of cars has become a major part of the cost of transportation. In our modern society with the accident rate reaching terrible proportions, and repair costs rising, finance companies must have some security for their investment. Therefore, insurance is usually required with the purchase of the car for the benefit of the purchaser, the dealer who may still have some equity in the car, and the finance company. Therefore, insurance has become almost an integral part of the credit sale of automobiles. It represents in many cases a very important part of the charge beyond the price of the car itself. For example, the total amount car owners paid for collision insurance, usually a prime requirement in the financing of a car, reached $134 billion in 1953. Because of the importance of the insurance factor in financing of automobiles many large finance companies have their own subsidiary insurance companies. It is admitted by the financing companies that their subsidiary insurance companies write at least 70 percent of all policies on automobiles financed by them. The income deriving from this easily acquired business undoubtedly has made significant contributions to the profit figures and the volume of business done by the subsidiaries and the finance companies owning them. The lumping of the finance and insurance charges into the borrower's note, without definite identification or separation of the charges, undoubtedly has led to widespread abuse. The buyer finds it very difficult to know exactly what insurance he is buying, or the amounts charged for it, and whether he is being given the correct and legal rate approved by the State insurance regulatory agency for his individual case. Recently there have been some serious allegations made regarding some finance companies and their subsidiary insurance companies. We shall hear testimony with respect to these allegations this morning. The National Better Business Bureau has long been a champion of the consuming public. It has ably helped this subcommittee in the past by checking on "gyp" and misleading advertising and merchandising practices in the automobile field. Its reputation is beyond reproach as a guardian of the public, and its courage in pursuing worthwhile ends is well known. Our witnesses this morning are representatives of the installmentcontract committee of the Association of Better Business Bureaus. The committee has been engaged in a State-by-State survey and study of finance practices and with misclassification of automobile insurance risks. Their search for facts has taken them into every State and the study has been in progress for the past 12 months. Mr. Kenneth Barnard, president of the Chicago Better Business Bureau, and chairman of the installment-contract committee of the Association of Better Business Bureaus, is our first witnesses this morning. He will be followed by Mr. Allen Backman, executive vice president of the National Better Business Bureau, and Mr. John O'Brien, director of the Better Business Bureau of Akron, Ohio. I might add that we have a distinguished guest this morning, Mr. Victor H. Nyborg, president of the Association of Better Business Bureaus. He has worked constantly with this committee to help bring about this study and to require disclosure of the elements of the automobile installment contract. His study has resulted in rules passed on that subject by the Federal Trade Commission in 1952. Our first witness will be Mr. Kenneth Barnard, of Chicago. Mr. Barnard has been in the better business field since 1919 after his graduation from the University of Michigan, where he received a bachelor of laws degree. He became head of what is now the National Better Business Bureau in 1922. He became manager of the Better Business Bureau of Detroit in late 1924. He became general manager and later president of the Chicago Better Business Bureau in 1932, the position he now occupies. He is former president of the Association of Better Business Bureaus and for many years chairman of the committee on installment contracts. We are very glad to have you present, Mr. Barnard, and for the information that you have supplied to our committee in calling this matter to our attention. I would like to say as we start these hearings, if you have no objection, we would like to have our witnesses under oath. |