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More "Special Loopholes"? The Pentagon Versus the Car Dealers

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Thirty years ago, Rosemary Shahan was married to a Navy man and furious over a car buying experience she describes as "horrendous."

"The dealer said to our face," Shahan said, "'Go ahead and sue, you'll be shipped off anyway.'"

Shahan's response was to picket the man's lot for months before creating Consumers for Auto Reliability and Safety, or CARS, an advocacy group that finds itself in the thick of a Beltway policy debate that has drawn even the attention of President Obama, who yesterday spoke out against a "special loophole" sought by the country's auto dealers.

As early as Thursday, the Senate will consider an amendment by Sam Brownback of Kansas that would exempt auto dealers from a proposed new consumer financial protection bureau.

Brownback's argument is that the lenders, banks included, that finance auto deals will be covered; why saddle the car dealers, who have enough woes in hard economic times, with an extra layer of regulation by requiring them to submit to this new agency? The President's point boils down to this fact: auto dealers broker nearly 80 percent of the car loans in our country.

"The Obama administration gets it," Shahan said. "They know you can't regulate auto lending without regulating the dealers. The dealers control the flow of money and the terms." To Shahan's way of thinking, the Pentagon gets it as well. That's what makes this so potentially interesting a political fight. The Department of Defense has thrown its considerable heft behind those insisting that automobile purchases and dealer-assisted financing need to be part of any comprehensive financial reform package.

"What the car dealers do the military is disgraceful," Shahan said.

Talking with Shahan means learning a whole new vocabulary. In The New York Times, I wrote about a soldier at Fort Hood who fell victim to what consumer advocates call the 'yo-yo deal.' A customer signs an agreement, drives off the lot, but then the dealer phones to break the bad news: the financing fell through, you'll have to pay a lot more if you want to keep that car.

According to a 2009 study by the Center for Responsible Lending, one in four car buyers earning $25,000 or less who sought dealer-arranged financing claims to have been the victim of a yo-yo deal.

Then there's what critics like Shahan call a "power booking." That's when a dealer inflates the worth of a car on a loan application by claiming phantom features that exist only in the paperwork. The buyer is unaware of the trick being played and therefore believes he or she is paying a fair price for an auto. And the dealer can hoodwink the lender, who thinks the car being funded is worth more than it actually is.

That's what a group of five soldiers in Fort Riley in Kansas say happened to them when each bought a car from the Dick Edwards Auto Plaza, a dealership near the base that caters to military personnel. According to a lawsuit filed on behalf of the five by Michael Shultz and James Kaup of Lawrence, Kansas, a soldier named Richard Black bought a 2005 Impala whose price was inflated by the alloy wheels ($400), leather seats ($600), LS Sports Package ($575), and power sunroof ($600) that didn't exist. Another, Mark Padfield, bought $1,175 of phantom features on a 2006 Sebring that inflated the price to more than $14,000.

Each of the five soldiers bought his or her car through a program called MILES (Military Installment Loan and Education Service), which was created because those entering the military tend to have so little financial experience and little or no credit. "In many cases," promotional materials for MILES say, "the newest members of our nation's defense are therefore preyed upon by dealers who charge exorbitant interest rates and prices for vehicles of questionable quality."

An audit of Dick Edwards, Sherri Helmond, a spokeswoman for the MILES program said, uncovered "clear violations of program standards on the part of the dealer - specifically that there were options included in the price of the vehicle that were not actually on the vehicle."

The two lawyers, Shultz and Kaup, were able to win an out-of-court settlement for their clients -- but that seemed an empty victory, at least for Michael Shultz, who said, "Unfortunately, MILES only audited a very limited time period despite our firm belief that power booking probably had been going on for years and that hundreds of soldiers had been subject to the practice."

Kevin Case, who identified himself as counsel for Dick Edwards, asked me to send him written questions but, though I complied, he then ignored my follow-up emails and phone calls.

Ed Tonkin, however, an Oregon car dealer and chairman of the National Automobile Dealers Association, proved eager to talk. He told me resents the implication that car dealers are somehow standing in the way of military readiness.

"There perhaps been certain unfortunate incidents in certain base cities around the country but nothing like the systematic problem that these Chicken Littles would have you believe," he said.

Yet the rhetoric of the MILES program suggests otherwise, as do counselors and attorneys charged with trying to help young soldiers navigate the choppy waters of a car purchase.

"The problem is pretty much endemic across the country as far as I'm concerned and not just among the military," said Roy Ells, a retired Marine now working as a financial counselor at Camp Lajeune in North Carolina. "I'd say it's enough of a problem that auto dealers should most certainly be included in any financial reform act."

More than 30 military organizations, including the Military Officers Association of America and the National Military Family Association, have lined up against the auto dealers. "Our objective is to get as broad a provision out there to protect our troops," said Michael F. Hayden, a retired colonel who works as a lobbyist for the military officers' association.

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