The Unregulatable Car Dealers

(cc photo by TheTruthAbout)

(cc photo by TheTruthAbout)

One of the enduring wonders of the American political system is the enduring political power of automobile dealerships. Thus even though “used car salesman” is a synonym for unscrupulous business practices, and the car market a key example of market failure in the economics literature it seems that automobile dealers are going to be exempted from consumer protection regulation in financial reform legislation. This makes no sense whatsoever. There’s a case (from anti-paternalism, etc.) for the idea that no consumer credit products should be subject to consumer regulation rules, but if any consumer credit products should be regulated than car loans certainly should be. Pat Garofalo and Annie Lowrey both make the case persuasively and I have nothing else to say about it.

This is, however, an opportunity to recommend a very interesting piece of journalism I read back in 2008 in the Baltimore City Paper that exposed another aspect of the shady world of automobile finance:

A typical scam–one that Charm City Motors engaged in, according to court testimony–involves using drug cash to buy cars and issuing fake loan documentation associated with the purchase. When law-enforcement officers seize the vehicles, which often happens, the car dealer tries to repossess the car with a phony lien. The express purpose of such a scam, according to veteran law enforcers who have seen it executed to perfection, is to facilitate drug trafficking and money laundering by keeping cars and money moving through the underground economy.

According to local, state, and federal law enforcers, there’s only so much the government can do to prevent it. “After a while, it’s like being a doctor,” says veteran Assistant State’s Attorney Rudolph Drayton, who handles on average more than 300 drug-related forfeitures per year. “You see similar patterns of illness, and it’s just a matter of how the illness was contracted.”

Yes it’s hard to believe that there’s a Baltimore money laundering scam that they left out of The Wire, but there you have it. At any rate, I have no idea how common this is on a nationwide basis, but it serves to illustrate the fact that when you let institutions engage in banking activities without scrutinizing them in the way that you would scrutinize a bank, you open the door to trouble.