05/17/2010 05:45 pm ET Updated May 25, 2011

Let's Eliminate the Auto-Loan Loophole

This week, the Senate will be considering a proposal by U.S. Sen. Sam Brownback, R-Kan., to exempt automobile dealers from the oversight of a proposed consumer-protection agency. The current Senate version of financial reform would require auto dealers who offer loans to comply with new consumer-protection rules.

I am hopeful that the Senate will continue to hold the line and fend off special interest amendments that seek to create some of the same loopholes that unfortunately cropped up in the House legislation.

I am proud of the strong financial reform consumer-protection legislation that the House of Representatives passed in December. The House bill will end taxpayer bailouts of banks, shore up the economy and provide much needed consumer protections for financial products. However, I am not proud of the special interest loophole included in the House bill that exempts auto dealer lenders from consumer-protection oversight -- the U.S. Senate should not make the same mistake as they consider this legislation. This is critical for Congress to pass a final bill that ensures that auto-loan borrowers receive the same protections as other borrowers.

If the House version prevails, the second-largest consumer financial purchase households typically make -- buying a car -- will escape administrative scrutiny if purchased with a loan. Rather than have the new Consumer Financial Protection Agency (CFPA) ensure that car loans are understandable and straightforward, auto dealers will be free to continue using the same tricks and traps that some of them currently employ.

When a buyer shows up at a dealership to buy a car, dealers realize the audience may be captive for only so long -- time is of essence in order for a dealer to sell the car before the prospective buyer hesitates or gets cold feet. Buyers are typically too preoccupied with the flurry of looking at a car, taking a test drive and signing on the dotted line to focus on the terms of the loan they're getting from the dealer. A crucial part of buying a car is securing financing -- regrettably, this financing comes at a significant price.

Car dealers typically borrow money at wholesale interest rates, then charge car-loan borrowers a higher rate. According to the Center for Responsible Lending, consumers spend more than $20 billion a year in excess interest by borrowing through a dealership instead of through a bank or credit union. It should come as no surprise that the auto loans are incredibly profitable for the industry -- more than half of Ford Motor Company's $2.7 billion 2009 profit came from its financing arm. Auto loans are big business -- according to the Cambridge Winter Center, at more than $850 billion in outstanding loans, auto loans surpass the credit-card industry.

Some auto dealers argue that CFPA regulation would drive up costs by adding more unnecessary regulation and red tape. This is a tremendous exaggeration -- the CFPA regulation would focus only the segment of auto dealers that gouge consumers at usurious rates. While I believe most auto dealers engage in fair practices already, it is critically important that all dealers are held to the same standard.

This new regulation will create a level playing field for auto loans. An auto buyer has every right to seek his or her own car loan. In fact, it's wise to get quotes from other lenders before you walk into a dealer showroom. Your bank or credit union may offer a much better deal than the auto dealer may, and once you tell the dealer about other loan terms available to you, they just might "throw in" a more competitive rate. While auto dealers may argue that it is unfair for them to be subject to more competition, how fair is it for the government to subject your bank or credit union to consumer-protection rules, but not auto dealers who provide an identical service?

Special-interest lobbying that creates loopholes must come to an end. When the House passed financial reform in December, auto dealers got a bump in sympathy from Congress because many of the bailed-out auto manufacturers began to disenfranchise dealers. But sympathy for the auto dealers facing hardships is no basis to give them a free pass to fleece consumers. Let's make sure that we close the auto-loan loophole.

(Commentary for Finance & Commerce)