This week, the conference committee reconciling the House and Senate versions of financial regulatory reform has been slowly chipping away at its long list of provisions to consider. Still on the list is consumer protection, and one aspect of that is hashing out whether the proposed consumer protection regulator will be able to police auto lending.
Both the House and the Senate bills create a new regulator solely geared towards protecting consumers, but the House bill exempts auto financiers from the new agency’s oversight. The Senate bill does not include a similar exemption, but the upper chamber did pass a “motion to instruct,” sponsored by Sen. Sam Brownback (R-KS), directing the committee to defer to the House’s language.
The Obama administration, as well as the Department of Defense (due to shabby treatment of military personnel at the hands of auto dealers) are staunchly opposed to the exemption. But today, 62 House Democrats voiced their support for the auto dealer exemption, calling the House bill an “appropriate compromise“:
The House bill recognized that auto dealers are retailers who do not service, fund, or underwrite auto loans, but merely facilitate financing to help their customers purchase a vehicle…We believe the balance achieved in the House bill is an appropriate compromise that will ensure auto dealers can still offer optional dealer-assisted financing while maintaining strong consumer protections.
For starters, the notion that the House bill is a “compromise” is absurd. There is no middle ground here. Auto dealers either have to follow the consumer regulator’s rules or they don’t, and the House language makes the latter the standard.
There are plenty of good reasons for including auto dealers within the new consumer protection regime. First, exempting them creates an uneven playing field, giving auto dealers an advantage over lenders such as credit unions and community banks. Leaving part of the market unregulated makes regulatory arbitrage (shifting financial products to unregulated parts of the market) far more likely.
But more importantly, auto finance is a market ripe for deceptive and abusive practices. 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.” The situation is particularly bad for women, senior citizens, and minority borrowers, all of whom, according to the Federal Reserve, are consistently charged higher interest rates on auto loans. The National Consumer Law Center also found that auto financiers routinely charge higher mark-ups on loans to minority borrowers.
Of course, auto dealers have significant clout on Capitol Hill, since there are 18,000 of them scattered across the country. Since 2007, trade groups for auto dealers have spent $12 million lobbying, and auto dealers, their employees, and political action committees donated $9.3 million to candidates during the 2008 election cycle. But consumer protection only succeeds if there is a level playing field and every entity — be it bank, payday lender, auto dealer, or anything else — has to play by the same rules.