WASHINGTON -- Car sales are surging and subprime loans are helping to drive the growth, but some consumers are getting run over.
A recent New York Times story highlighted some lending shenanigans familiar to anyone who remembers the subprime pileup in the housing industry. That mess led to a crackdown on Wall Street lending practices -- but lawmakers made a very deliberate decision not to include auto dealers in new regulation.
The Wall Street reform bill passed in 2010 excluded auto dealers from the purview of the new Consumer Financial Protection Bureau. While the bureau regulates auto lenders, the dealers -- who connect car buyers with the lenders -- are overseen by the Federal Trade Commission. Consumer advocates say the resulting ripoffs are a fairly predictable result of the car dealer carveout.
"Having separate regulators for dealers and lenders doesn’t make a lot of sense," Chris Kukla of the Center for Responsible Lending told HuffPost. "The two parties are inextricably linked in the auto finance world."
Kukla said existing regulation should prevent most bad auto lending practices, but having separate agencies handling enforcement is a problem.
The Times report detailed subprime auto-loan ripoffs such as inflated loan amounts, high interest rates and loan documents with false info about borrowers' incomes. Previously, Bloomberg and The Wall Street Journal have highlighted the risks to investors of the increase in subprime auto lending. The Office of the Comptroller of the Currency, a bank regulator, warned lenders in June about auto credit risks.
So why did Congress exclude dealers from financial regulation?
The way it unfolded is a lesson in the way power is wielded on Capitol Hill. For one, there's the direct conflict of interest. Rep. John Campbell (R-Calif.) pushed for the carveout during bank reform negotiations while he was at that very moment, according to his financial disclosures, collecting rent from auto dealers.
But one conflicted auto dealer serving in Congress wouldn't be enough on its own. Campbell and his allies also had geography on their side. Every member's district has a bunch of auto dealers, and they tend to be the kind of civic-minded businesses that sponsor Little League teams and blanket the region with ads. A politician naturally wants to help such local businesses.
And finally, the House Financial Services Committee has become such an effective money-raising tool that both parties stock it with their most vulnerable members, the kind that can least afford to alienate a constituency like dealers.
That's precisely how it played out in the committee when Campbell's amendment to exempt auto dealers from the CFPB's gaze came up. The veteran Democratic lawmakers in comfortable districts mostly all voted against the measure.
But then the freshmen and sophomores got their turns to vote. Seated, due to their junior status, on the lower risers, they turned the tide, and a curious thing happened, as we reported at the time for a story on the banking panel, "The Cash Committee: How Wall Street Wins On The Hill":
Then came the bottom two rows, the place where reform goes to die. Despite the disapproval of the powerful chairman [Barney Frank (D-Mass.)] and nearly every consumer group in the country, the Campbell amendment passed by a 47-21 margin.
A video of the vote on Campbell's amendment shows how the auto dealers won their victory. It's both serious and comical. After the senior committee members enter their no votes, the bottom two rows begin weighing in with yes after yes after yes -- followed by unanimous ayes from the GOP side.
Then, once it becomes clear that auto dealers are getting their way, those senior Democrats -- not wanting to get on the bad side of a powerful industry for a losing cause -- actually start switching their votes from no to yes.
As confusion spreads and more votes are changed, Frank tweaks his colleagues with a subtle dig. "Can I ask this? Would members please vote loudly, especially if you plan to vote differently than the clerk anticipates?" The chamber echoes with laughter.
Pretending that there is some mistake, several members ask the clerk how they were recorded before asking to switch their votes. After Rep. Dennis Moore (D-Kan.), a senior [member of the bank-friendly "New Democrats"] and a subcommittee chairman, employs this technique, Frank puts a stop to it. "I would also say, at the same time, if you know how you're recorded, don't ask the clerk. Just change your vote," he says. This time, there is no laughter.
Later on, when the bill was on the House floor, Frank and [Mel Watt (D-N.C.)], a subcommittee chairman, tried to narrow the exemption but failed. The lopsided committee vote had sapped the strength of the opposition.
Clarification: Language has been amended to correct a reference to auto lenders, rather than dealers, as being exempt from CFPB regulation.