March 23, 2018
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Auto Loan Exemption

Although it doesn’t make sense to have one agency regulate car loans from a bank and another oversee loans from car dealers, this is what Congress did when it exempted auto dealer financing from jurisdiction under the newly enacted Consumer Financial Protection Bureau.

The exemption is a flaw in the otherwise admirable financial regulatory reform bill now signed into law by President Barack Obama. Maine’s two senators, Susan Collins and Olympia Snowe, broke ranks with their Republican Party leadership to bring the measure to a successful vote.

When the House of Representatives was considering the creation of a new federal consumer agency, a California congressman, who happens to be a former Saab dealer and who still collects rent from his former auto dealer colleagues, proposed that auto dealer financing be exempted. The House went along with that exclusion, and the Senate, by a 60-30 vote, kept that exemption in the final bill.

While the issue did not attract much public attention, a furious lobbying campaign erupted, pitting the National Automobile Dealers Association against consumer advocates. The Pentagon entered the fray, strongly opposing the exemption. An Army undersecretary told of a survey of Defense Department personal finance counselors in which 72 percent said they had advised troops on bait-and-switch financing, loan application falsification and extra fees and charges. Undersecretary of Defense Clifford Stanley said that the personal financial readiness of the troops and their families was at stake.

Next to a house, a car is most families’ largest purchase, and most of them are bought on credit, which argues for strong oversight of auto dealer financing. It’s a matter of argument how many of the dealer loans involve abuses such as kickbacks from favored lending agencies and unnecessary add-ons. The Center for Responsible Lending calculates that overcharges cost Americans $20 billion each year. It reports that Maine’s total dealer kickback volume in 2007 was more than $68 million.

The auto dealers’ organization contended that dealer-assisted financing is already regulated by the Federal Trade Commission, and that new federal regulation would merely add red tape and expense. It disputed the $20 billion figure, saying that it “represents all amounts received by dealerships above the wholesale cost of funds and fails to recognize that consumers cannot get auto loans — whether arranged by a dealer or directly from a bank or credit union — at a wholesale rate.”

The network of some 18,000 dealerships, described as “Main Street auto dealers,” although 70 percent of their loans are moved on to Wall Street, prevailed.

Regulators and consumer advocates should keep an eye on the situation. If there are documented abuses, they should work to bring dealer financing under the umbrella of the Consumer Financial Protection Bureau.

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