The New York Times earlier this month profiled Army specialist Matthew Garcia, a 25-year-old who was the victim of a “yo-yo deal” when he attempted to purchase an automobile. He agreed to pay 19.9 percent interest on a $12,000 loan, but was contacted by the auto dealership days later and told that his financing had fallen through.
Garcia was called back to the car lot, at which point he was told that he would need to put an additional $2,500 down. He refused, “but by that time someone had blocked his car so he could not leave,” according to the Times. “I was tricked, manipulated and lied to,” Garcia said. “And I feel like it was intentional.”
Sadly, tales like this are not in short supply. Yet, if auto dealers get their way, they will be exempted from the new consumer protection rules that are currently being crafted in Congress. As part of their respective financial regulatory reform bills, both the Senate and the House of Representatives propose the creation of a new consumer protection agency that would be tasked with policing consumer lending and financial products. This new regulator would have the power to ban products that are deemed predatory, and could require lenders to both improve their disclosure forms and produce clear, straightforward contracts.
The bill passed by the House exempts auto dealers from the agency’s oversight, courtesy of an amendment sponsored by Rep. John Campbell (R-CA). The Senate bill does not include a similar exemption, but the upper chamber did pass a “motion to instruct,” sponsored by Sen. Sam Brownback (R-KS), directing the conference committee that will reconcile the two bills to defer to the House’s version.
Clearly, auto dealers have significant clout on Capitol Hill. There are 18,000 of them scattered across the country, and their lobbying arm, the National Automobile Dealers Association, threw its weight around in favor of the exemption. Since 2007, trade groups for auto dealers spent $12 million lobbying. Auto dealers, their employees, and political action committees donated $9.3 million to candidates during the 2008 election cycle.
But if the exemption is codified into law, it will be to the detriment of consumers and will create a gaping hole in the newly constituted consumer protection system. And most open to such abuse are the young men and women in our armed forces, for whom an automobile is often the largest financial obligation. Army specialist Matthew Garcia’s story is repeated time and again across our country. That’s why the Department of Defense is making such a concerted effort to defeat the auto dealer exemption.
“Over the years, many of our Soldiers have fallen victim to predatory lending practices and have entered into contracts for prohibitively expensive financial products promoted by some unscrupulous car dealerships and lenders,” wrote Secretary of the Army John McHugh in a letter to Senate Banking Committee Chairman Chris Dodd (D-CT). “We owe them the protection and oversight that would be afforded by the [consumer regulator].”
The Military Coalition, a consortium of military and veterans’ organizations, also expressed its opposition to the exemption, saying that “including the auto dealers’ financing and sales in the financial reform bill will provide greater protections for our service members and their families. Providing a ‘carve out’ for auto dealers does just the opposite.”
Indeed, the very nature of the auto market lends itself to the proliferation of predatory loans and unfair consumer practices. As the Cambridge Winter Center for Financial Institutions Policy points out, “auto finance is demonstrably susceptible to unfair and deceptive practices” including mark-ups and a host of fees, “and those practices are demonstrably not held in check by private market forces alone.”
According to the Center for Responsible Lending, “consumers spend more than $20 billion a year in excess interest by borrowing through a dealership instead of through a bank or credit union.” The situation is particularly bad for women, senior citizens, and minority borrowers, all of which, according to the Federal Reserve, are consistently charged higher interest rates.
This finding has been reinforced by the National Consumer Law Center, which found that auto financiers routinely charge higher mark-ups on loans to minority borrowers. “Analyzing data from all 50 states, the average auto dealer markup for African Americans was $656 compared to $245 for whites,” the center found. “In a later case in which data for Latino borrowers was analyzed, the average auto dealer markup on loans assigned to Ford’s Primus division was $715 for Latinos compared to $464 for whites.”
There is currently no prudential regulator for auto financing like there is for banks, which has allowed these pernicious lending practices to multiply. It is therefore entirely appropriate for the new consumer regulator to have jurisdiction over auto dealers.
One common argument coming from both the auto dealers and their defenders is that auto financing did not play a role in the financial crisis, and thus does not need to come under the purview of the new consumer protection regime. And it’s true that the economic crisis had nothing to do with auto loans.
But exempting them from the new consumer protections while allowing their predatory lending to continue unabated would create an uneven playing field, giving auto dealers an advantage over other lenders such as credit unions and banks. Leaving part of the market unregulated begs for regulatory arbitrage and would allow dealers to distort the marketplace, which for auto loans is already very susceptible to deceptive practices.
What’s more, auto loans are part and parcel of one aspect of our financial system that will undergo thorough reform under the legislation now in conference committee. Auto loans are securitized (chopped up, repackaged, and sold) just like mortgages. Part of the regulatory reform effort involves cleaning up the securitization chain and ensuring that a bundle of toxic loans can’t be turned into a financial product that obscures the risk of the underlying assets. Again, regulating one part of the chain while carving out another will lead to a distorted market and unpredictable securitized products.
Consumers cannot be fully protected by the new regulator if certain classes of financial products are deemed off limits. And there’s simply no justifiable reason that auto dealers and auto financing shouldn’t be subject to the same rules that will govern all other lenders and financial products going forward.
Pat Garofalo is an Economics Researcher at the Center for American Progress and a Blogger at the Center for American Progress Action Fund.