When the House of Representatives passed its financial regulatory reform bill last year, it included an independent Consumer Financial Protection Agency (CFPA). However, an amendment to the bill exempted auto dealers from the agency’s authority, despite the unscrupulous lending practices in which auto dealers routinely engage.
Now that the financial reform debate has migrated over to the Senate, a similar effort is underway, led by Sen. Sam Brownback (R-KS), who has offered an amendment exempting auto dealers from the authority of Sen. Chris Dodd’s (D-CT) Bureau of Consumer Financial Protection. But Brownback is facing a powerful counterweight — the military.
In February, the Department of Defense penned a letter to the Treasury Department saying that it “would welcome and encourage CFPA protections…with regard to unscrupulous automobile sales and financing practices”:
We recognize Service members and their families are under increasing stress. When we have asked in surveys about the causes, Service members responded that finances were second only behind work and career concerns…Since auto financing represents the most significant financial obligation for the majority of Service members; particularly in the junior enlisted grades, we believe the intervention of the CFPA in overseeing auto financing and sales for Service members will help protect them and will assist us in reducing the concerns they have over their financial well-being.
The Military Coalition, a consortium of military and veterans’ organizations, has also expressed its opposition to the Brownback amendment, saying that “including the auto dealers’ financing and sales in the financial reform bill will provide greater protections for our service members and their families. Providing a ‘carve out’ for auto dealers does just the opposite.” Indeed, it makes little sense to set up a consumer protection regulator and then wall it off from protecting consumers from a particular financial product, particularly one that has been as abused as auto loans.
As the Cambridge Winter Center for Financial Institutions Policy has pointed out, “auto finance is demonstrably susceptible to unfair and deceptive practices” — including mark ups and a host of fees — “and those practices are demonstrably not held in check by private market forces alone.” The New York Times today profiled one instance of a dealer demanding more fees from a military member whose purchase was already completed, while blocking him into the dealership’s parking lot.
The National Consumer Law Center has also found that auto financiers routinely charge higher markups on loans to minority borrowers. “Analyzing data from all 50 states, the average auto dealer markup for African Americans was $656 compared to $245 for whites,” the Center found. While auto dealers accurately argue that they had nothing to do with the financial crisis, allowing these pernicious practices to continue right under the nose of a new consumer regulator would be highly irresponsible. The House already blew it on this front, but the Senate doesn’t need to follow suit.
Update
Secretary of the Army John McHugh wrote a letter today to Dodd saying that the army has “strong concerns” about exempting auto dealers:
Over the years, many of our Soldiers have fallen victim to predatory lending practices and have entered into contracts for prohibitively expensive financial products promoted by some unscrupulous car dealerships and lenders. Though the Army does educate our Soldiers about buying cars in our normal financial education curriculum, the fact remains that junior enlisted Soldiers — many of whom are drawing a regular paycheck for the first time in their lives and are inexperienced in financial matters — remain an easy target for dishonest brokers. We owe them the protection and oversight that would be afforded by the CFPA.
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