As early as today the U.S. House Financial Services will vote on a bill aimed at reforming our nation’s troubled financial system by creating a Consumer Financial Protection Agency. This agency would do the same thing for financial products that the Food and Drug Administration does for medical safety and the Consumer Products Safety Commission does for products like toys and electronics: set common sense rules to keep institutions from peddling bad mortgages and loans that destroy families’ financial futures. The Consumer Financial Protection Agency could have headed this financial crisis off at the pass by preventing millions of mortgages with wildly adjustable rates and exploding payments from ever entering the market.
A recent survey of consumer installment lenders making used car loans in the Chicago region found rates as high as 177 percent to borrowers making less than $22,000 a year. Not surprisingly, predatory car loans have typically ranked first among consumer complaints lodged with state and local consumer protection agencies.
Later this week, Members of the Financial Services Committee, including Representative Bean, will be asked to vote on an amendment to the underlying bill that would exempt car dealers from coverage by the CFPA. They should vote no on this dangerous amendment, to be introduced by Rep. John Campbell (R-Calif.), himself an automotive dealership executive.
Currently, a majority of dealers derive their profits not from the sale of cars but rather from their “Finance and Insurance" departments. Seasoned, trained F & I managers, paid largely on commission, use sophisticated software programs to maximize profits from financing and add-ons in car sales transactions. There are a number of ways to do this.
Most dealers sell the notes almost immediately to auto finance companies and increase their shared profits by intentionally placing consumers in more expensive loan products, with higher interest rates, than the consumers are entitled to obtain based on their credit histories.
Dealers also profit from loan financing through a shady tactic known as "loan packing." This involves dealers using the fact that they are selling both the car and the financing to include overpriced add-ons, such as credit life insurance, credit disability insurance and “GAP” insurance plans that claim to cover the difference between the over-priced car loan and the true value of the vehicle in the event of a collision or theft. In some cases, car buyers were misled into paying thousands of dollars for items worth less than $100, such as key chains or "theft etch."
These are only a few of the many sophisticated practices that lead to a vicious cycle of negative equity, as more vehicle owners sink deeper into debt for a product that for many families is a necessity. Predatory auto lending costs consumers billions. There is no rational reason why auto lending should be exempt from coverage under the Consumer Financial Protection Agency and this exploitation allowed to continue.