In the new consumer financial protection bill making its way through Congress, a major debate centers on whether to include car dealers under the bill's provisions. We think consumers deserve protection from unfair or deceitful car-selling practices. (Read: " Auto loans are focus of Capitol lobbying.
The bill sets tougher rules for consumer lenders, Wall Street brokers, and other financial firms, and it would establish a new Consumer Financial Protection Agency (CFPA) that would guard against risky financial practices. This new agency was conceived as a way to avert the type of widespread financial crisis that happened in 2008. Congress is beginning debate on reconciling the versions of the bill that passed in the House and Senate. The Senate version would include car dealers under the agency's oversight. The House version would exempt them.
At issue is whether car dealers act as lenders in making car loans. Car dealers are lobbying hard to get an exemption from the scrutiny of this new bureau for dealer-assisted loans. They argue that dealers are not lenders and so should not come under the new regulations. They say car dealers merely facilitate car buyers getting loans from banks or other third-party lenders. Consumer organizations say that because dealers make or arrainge the loans—by taking the loan application and sometimes affecting the terms of the loan by taking markups on the interest rate, for example—car dealers are acting as lenders and should fall under the enforcement powers of the CFPA agency.
That's the stand that Consumers Union (CU), the non-profit publisher of Consumer Reports, takes in a new advertisement, appearing in this week's Politico magazine. "An auto dealer loophole in financial reform legislation puts consumers at risk," it says. (See more details on CU’s position
CU spokesman David Butler says, "Congress should not make a special exemption for auto dealer loans in this bill in the interest of consumer protection."
CU particularly supports a provision in the bill to create a consumer financial protection bureau to oversee consumer loans and other financial products. Butler cites consumer complaints of practices such as spot delivery, power booking, and packing payments.
Spot delivery involves letting the consumer drive the car off the lot before financing is approved and can be followed by calling the consumer back to return the car or agree to less favorable loan terms. Power booking involves inflating the value of the car beyond what a lender approves by adding additional dealer options, accessories, and insurance. And payment packing involves marking up monthly payments beyond what's required to meet principal and interest payments on the amount financed. All of these practices are illegal, but consumer groups along with the Department of Defense argue that they are rarely prosecuted. While many dealers are honest in their financing practices, some get away with these practices, says Rosemary Shahan, a consumer advocate who runs Consumers for Auto Reliability and Safety in California.
On Capitol Hill, a committee of key House and Senate members is working on a final version of a long-awaited financial reform bill.
— Eric Evarts