As debate begins on the Senate financial reform bill, the strong consumer protections contained in the Restoring American Financial Stability Act (S. 3217) will surely come under assault from special interests and their armies of lobbyists—and not all of them are from big banks.
Auto dealers are concerned about a federal consumer financial protection agency because they often broker loans, in partnership with banks or credit unions, for car purchases—in fact, they issue almost 80 percent of loans and leases used for car purchase. With $850 billion in outstanding balances, dealer-issued car loans comprise a market as large as the credit card market. Millions of workers rely on cars to get them to their jobs and a car is often one of the largest purchases they’ll make in their lifetimes.
The National Automobile Dealers Association spent over $3 million on lobbying in 2009 alone. This got them a carve-out from the version of the Consumer Financial Protection Agency (CFPA) passed by the House. Sure enough, auto dealers are looking for a carve-out again through Senator Ken Brownback (R-KS)’s amendment that would exempt auto dealers from the Senate’s Consumer Financial Protection Bureau (CFPB).
A carve-out for auto dealers would not only create a carve-out for a large credit market—it would protect a loan product that often contains tricks and traps designed to confuse the consumer and pad profits for the dealer. Auto dealers now make most of their profits not from the sale of the car but from their finance and insurance departments. A recent Woodstock 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. Experts note that dealers can obscure the true cost of auto financing with add-on fees and often charge a mark-up beyond the price quoted to them by their lender, which costs consumers an estimated $1.1 billion per year. Introducing a carve-out for auto dealers would create a competitive disadvantage for community banks and credit unions that would be regulated under a consumer financial protection agency.
Considering the high cost, deceptive practices, and widespread use of dealer-issued auto loans, consumers cannot afford to exempt auto dealers from strong federal consumer protections. The auto dealer industry argues that they did not cause the financial crisis, but a strong consumer protection agency must be empowered to detect and stop the problems of the future before they start, not just react to the problems of the past. A consumer financial protection agency would be able to set standards for fair fee structures and increased transparency and disclosure in the auto dealer finance market that would help consumers, particularly people of color and low-wealth persons, build and save wealth.