All Auto Financing Should be Covered by the Consumer Watchdog

"You have an opportunity to do something about unscrupulous [auto] dealers. The above-board firms shouldn't have a problem with [the consumer financial protection agency]." – Michael Hayden, Military Officers Association of America[1]

The current financial system has left America's families, its military, its community banks, and its responsible auto dealers unprotected from the minority of dealer-lenders who sell unfair auto loans with hidden fees. Such practices can tarnish the reputation of the entire industry. Exempting irresponsible dealers would help Wall Street at the expense of America's families and honest dealers and lenders. As President Obama said in a speech on financial reform on April 22, 2010, "unless your business model depends on bilking people, there is little to fear from these new rules."

Financial Reform Will Protect America's Military Families and Military Readiness From Auto Finance Abuses

Too many members of our military have been caught up in bad loans, threatening military readiness:

• "We recognize Service members and their families are under increasing stress. When we have asked in surveys about the causes, Service members responded that finances were second only behind work and career concerns and ahead of deployments, health, life, events, family relationships and war/hostilities." – Undersecretary of Defense for Personnel and Readiness Clifford L. Stanley, February 26, 2010, in a letter to Michael S. Barr, Assistant Secretary for Financial Institutions, U.S. Treasury Department
• Threatens military readiness: Undersecretary Stanley's letter states that the "personal financial readiness of our troops and families equates to mission readiness." He reports that 72% of financial counselors surveyed had counseled Service members on auto abuses in the past six months.
• Troops are victims of abusive lenders: Military families have been a target of unscrupulous lenders because of their demographic characteristics. Often, recently enlisted soldiers and sailors have their first steady paycheck and their first chance to be lured into easy credit offers. But there are also many experienced military families struggling with daily expenses such as child care and medical bills in the face of deployments and frequent moves.

The Pentagon believes a consumer agency would help protect troops from lending abuses:

• "Since auto financing represents the most significant financial obligation for the majority of Service members, particularly in the junior enlisted grades, we believe the intervention of the [consumer financial protection agency] in overseeing auto financing and sales for Service members will help protect them and will assist us in reducing the concerns they have over their financial well-being." – Undersecretary of Defense Clifford L. Stanley
• Smart financial choices: The agency will give Americans the tools they need to comparison shop for the best prices and the best loans. Greater transparency will increase competition and innovations that benefit borrowers, not take advantage of them through hidden costs and traps. And dealers that play by the rules will win customers when irresponsible dealer-lenders can no longer trick consumers into taking out loans full of unnecessary add-ons.
• The Federal Trade Commission (FTC) alone can't do the job: Given limited resources, the FTC has not brought an auto financing case since 2000.

American families and responsible dealers deserve a consumer agency that will protect them from abusive dealer-lenders:

• Wrong incentives: Like mortgage brokers, auto dealer-lenders can be paid more to sell loans with higher rates and fees than borrowers qualify for. Some dealer-lenders have seized on this perverse incentive to charge higher rates.
• Borrowers are unaware: Despite being paid to charge higher rates, it is common for a dealer-lender—just like a mortgage broker—to tell a car buyer, or allow a buyer to believe, that it searched for and is offering the best rate when, in fact, the buyer could actually get a lower rate. A 2006 survey found that nearly half of auto loan borrowers did not negotiate the price of their loans because they trusted the dealer to get them a good deal.[2]
• Bait and switch: Sometimes a dealer-lender sends the buyer home with a "purchased" car and calls a few days later to say that the financing "fell through." The borrower then is trapped into a new loan with an interest rate that is on average five percentage points higher than a loan to an equally qualified buyer without bait and switch.
• "Packing" loans: Dealer-lenders can also receive commissions to sell expensive add-ons to the loans, such as extended warranties. Some irresponsible dealer-lenders obscure the cost of add-ons, which can be thousands of dollars, by emphasizing that they only moderately increase the monthly loan payment.[3]

Financial Reform Will Bring Common Sense Lending Rules that Will Level the Playing Field and Bring Transparency for Car Buyers—Not Burden Responsible Dealer-Lenders

Financial reform and the consumer financial protection agency will not place any new burdens on auto dealers:

• No assessments: Under the Senate bill, no dealer-lender would be charged an assessment.
• No supervision: Under the Senate bill, the consumer financial protection agency would supervise only the larger market participants. This means most individual dealers would not be subject to the agency's supervision.
• Rules only cover lending: The agency's rules would only have the authority to cover the aspects of a car sale that involve the credit sale. The agency would have NO authority over the vast majority of what dealer-lenders do.
• Transparency for consumers: Those who argue that rules of the road will somehow make auto loans more expensive have it backwards. Strong, consistent rules of the road will bring more transparency for consumers about what they're getting and what they're paying for it. That means lower prices, higher quality, or both.

Exempting Dealer-Lenders Helps Wall Street, Hurts America's Families, and Threatens Community Banks

Exempting dealer-lenders would reward Wall Street and stifle competition by giving irresponsible dealer-lenders and big Wall Street banks an advantage over dealers, credit unions and community banks that play by the rules:

• Wall Street wins and responsible lenders lose if dealer-lenders are exempted: Exempting dealer-lenders means exempting Wall Street and putting community banks and credit unions at a disadvantage. Wall Street makes auto loans through dealers—and it pays them more to bring them loans with higher interest rates than the borrower qualifies for. Wall Street did the same with mortgage brokers, and it led many brokers to sell borrowers loans they didn't understand and couldn't afford. Families suffered, and so did community banks and credit unions, since they were subject to more oversight.
• An exemption favors Wall Street, not dealers and community banks: Free from regulation, Wall Street will continue to push dealers to offer the bad loans that make it impossible for responsible dealers to compete.
• Destroys trust: Families and responsible dealers have been hurt enough by the unfair and deceptive tactics from the minority of dealer-lenders who deceive their customers. Auto dealers will benefit from a consumer agency because it will restore American families' trust in dealers, in a year when dealers need customers more than ever.

Proposed exemption for dealer-lenders would expose families and community banks to unregulated payday lending:

• Too broad: The proposed amendment is so broad that dealer-lenders could sell expensive payday loans that would be exempt from any new rules the agency writes for the rest of the payday loan market. Dealer-lenders could also make auto title loans and tax refund loans outside the rules. This is because dealer-lenders would be exempt from all rules except those governing mortgages. Such lending would further tarnish the image of the auto dealer industry.
• Bad for responsible lenders: Unregulated payday lending by irresponsible dealer-lenders would hurt families and steal business from community banks that offer better lending alternatives, and it would subsidize price wars harmful to responsible dealers—who stick to just selling and financing cars.

[1] Michael R. Crittenden, "Lobbyists for Military, Auto Dealers Clash Over Bill," Wall Street Journal, April 22, 2010.

[2] Mark A. Cohen, "Imperfect Competition in Auto Lending: Subjective Markup, Racial Disparity, and Class Action Litigation," December 2006.

[3] Delvin Davis & Joshua M. Frank, Center for Responsible Lending, "Car Trouble: Predatory Auto Loans Burden NC Consumers," April 2009.