Senate Republicans have once again declared their support for special interests and Wall Street banks, all at the expense of the American consumer. Senator Brownback has brought forward an amendment to carve-out auto dealer financing from consumer protection rules written by the new Consumer Financial Protection Bureau. This amendment would hurt America’s families, our military, our community banks and credit unions, and our responsible auto dealers, all of whom would be left vulnerable to the predatory practices of Wall Street and the minority of dealer-lenders who sell unfair auto loans with hidden fees.
To ensure that consumers are protected, Senate Democrats have brought forward a plan to create a level playing field and empower consumers to shop effectively for the best financing available. The Consumer Bureau established under the Restoring American Financial Stability Act would defend the responsible lenders and crack down on the greedy practices that hurt hard-working American families. The Bureau, which would not place any new burdens on auto dealers, would give Americans the tools they need to comparison shop for the best prices and the best loans. Greater transparency would increase competition and innovation that benefit borrowers, not take advantage of them through hidden costs and traps. Regardless of where a consumer gets a loan, this bill ensures that they are protected from unfair, deceptive, or abusive lending practices.
Exempting dealers means exempting Wall Street and putting community banks and credit unions at a disadvantage. Wall Street makes auto loans through dealers – and it often pays these dealers more to arrange loans with higher interest rates than borrowers qualify for. This encourages some dealers to increase rates and pack loans with expensive and unnecessary add-ons, while using deceptive tactics to make customers think they’re getting a good deal.
The proposed amendment is so broad that irresponsible dealers funded by Wall Street could even sell expensive payday loans, auto title loans or tax refund loans without being subject to any of the Bureau’s rules for such products. This is because the proposed amendment would exempt dealers from all rules except those governing mortgages. Such lending would further tarnish the image of the auto dealer industry.
Free from regulation, Wall Street will continue to push dealers to offer the bad loans. And unregulated payday lending by some dealers will subsidize price wars harmful to responsible dealers – who stick to just selling and financing cars.
Military families have been a target of unscrupulous lenders. With their first steady paycheck in hand, recently enlisted service members often face their first chance to be lured into easy credit offers. Many experienced military families have also fallen victim to these unfair practices, while struggling with daily expenses such as child care and medical bills in the face of deployments and frequent moves.
In a recent letter to the Treasury Department, Undersecretary of Defense Clifford Stanley outlined the severity of the issue: “personal financial readiness of our troops and families equates to mission readiness.” He reported that 72 percent of financial counselors surveyed had counseled service members on auto abuses in the past six months.
Military families deserve a consumer agency that will crack down on abusive auto lending practices. While Republicans would like to preserve the status quo, the Restoring American Financial Stability Act would address:
·Wrong incentives: Like mortgage brokers, auto dealer-lenders are paid more to sell loans with higher rates and fees than borrowers qualify for. This gives dealers a perverse incentive to charge higher rates.
·Bait and switch financing: Sometimes a dealer-lender sends the buyer home with a “purchased” car and calls a few days or weeks later to say that the financing“fell through.” The borrower then is trapped into paying a higher interest rate.
·“Packing”loans: Dealers also receive commissions to sell expensive add-ons to the loans, such as extended warranties. Dealer-lenders frequently obscure the cost of add-ons, which can be thousands of dollars, by emphasizing that they only moderately increase the monthly loan payment.
·Discriminatory lending: Among consumers who obtain dealer financing, African Americans are almost twice as likely as whites to pay dealer mark-ups (54.6% of blacks versus 30.6% of whites), and African Americans are 70% more likely than white men to finance at the dealer rather than a bank or a credit union.
Delvin Davis & Joshua M. Frank, Center for Responsible Lending, “Car Trouble: Predatory Auto Loans Burden NC Consumers,” April 2009.
Mark A. Cohen,“Imperfect Competition in Auto Lending: Subjective Markup, Racial Disparity, and Class Action Litigation,” December 2006.
Ian Ayres,“Discrimination in Consummated Car Purchases,” 2005, available at http://islandia.law.yale.edu/ayers/abf%20conference.pdf.