Auto dealers arrived on Capitol Hill yesterday seeking special carve-outs from the proposed "Restoring American Financial Stability Act of 2010" (S. 3217). This banking reform bill aims to put an end to the reckless practices of Wall Street and the abusive and discriminatory tactics by financiers of all stripes.
In their search for a loophole, auto dealers claim that the bill will restrict affordable car loans and result in fee hikes. The dealers' concerns, itemized in a press advisory issued by the National Auto Dealers Association on April 26, patently ignore clearly stated rules in the bill. Before more misinformation is propagated, we need to set the record straight.
The auto dealers are urging senators to avoid over-regulating their dealerships, burdening them with redundant laws, and ultimately limiting consumers' credit options. These concerns are unfounded. A key feature of the "Financial Stability" bill is to consolidate the consumer protections currently scattered across several federal agencies under one roof by creating a Consumer Financial Protection Agency (CFPA). The CFPA would be charged with monitoring the financial marketplace and structured to react quickly to new tricks, scams, and abuses. In the case of auto dealers, the CFPA would not regulate the sale of a car or financing when the borrower obtains their financing from their bank or credit union. Dealers would only be subject to regulation―as they are now―when they affect the terms and conditions of auto loans. The bill would not impose onerous new regulations, but give the CFPA the authority currently held by the Federal Trade Commission (FTC), the primary regulator of most auto dealers: the power to address unfair or abusive lending practices wherever they occur. This would ultimately save the consumer money, not limit their credit options.
While not much will change for auto dealers in the way of rules, the CFPA promises to identify and stem abusive trends that have cropped up in the loosely enforced rules of today. Of all industries, auto dealers could use another cop on the beat. They are consistently the top source of consumer complaints to the Better Business Bureau and state and local consumer protection agencies. As in the mortgage industry, predatory and abusive financing practices have occurred throughout the auto market. Such abuses are especially prevalent among borrowers of color. Research shows that similar to home loans, Latino and African American borrowers are charged unnecessary mark-ups much more frequently than their White peers.
The "Financial Stability Act" will improve matters for consumers and ultimately lenders alike. Having authority over all lending entities, such as auto dealers, a strong CFPA would streamline and reward better practices and contribute to stabilizing the market. Exemptions for special-interest groups would carve out major players who have committed some of the biggest offenses in stripping our families of their honest dollars.
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"Even by the low analytical standards applied to hastily arranged, crisis-driven corporate welfare initiatives, the exemption of auto dealers from the CFPA is ill conceived.
Most obviously, the exemption is an affirmative step in the wrong direction for consumer protection in auto finance. It seeks to protect the players with the most dubious customer practices, and it discriminates against the relatively customer-friendly direct channel strategies pursued by community banks and credit unions.
The exemption also offends even the most basic principles of regulatory equity. Free-market adherents should be dismayed by the notion of special regulatory treatment for some classes of market participants (car dealers, national banks, Wall Street firms) over others (community banks, credit unions) that appear equally distressed in the current crisis.
Perhaps even more troubling than the auto dealer exemption itself, given the large, bipartisan majority of the House Financial Services Committee that supported it, is what it implies more broadly: The bipartisan zeal for, and growing comfort with, special interest subsidies that distort free markets in favor of the largest and most politically entrenched participants."