Auto Dealer Exemption a Lock for FinReg

June 23, 2010 | Last updated: July 31, 2020

Let’s say you are in the market for a new car, and you head down to view the stock at your local auto dealer. You pick out your car and decide to go ahead with the purchase. You make a decent salary, but do not have the funds to pay in full, in cash. In all likelihood, rather than heading to your bank or a local credit union, you will sit down and hear an offer from a lender right in the dealership. The dealer will finish the loan paperwork that afternoon, and you can drive off that evening.

There are 18,000 auto dealerships that make loans, and according to the studies of consumer advocates, they often do so using deceptive and predatory practices. Most dealerships do not directly provide the credit for borrowers; they grant a loan and then resell it to another financial company. Often, the dealership charges the borrower a higher rate than the creditor requires — keeping the difference between what the car buyer pays in and the financial company takes back as a kickback. According to the Center for Responsible Lending, those kickbacks make auto dealerships $20 billion a year.

Many dealers offer subprime car loans for borrowers with tarnished or no credit, meaning sometimes that borrowers pay more than twice the value of their car. They use bait-and-switch scams, changing financing terms after the deal is made. One in four borrowers who made less than $25,000 was scammed last year, and one in eight making less than $40,000 a year. People of color are more likely to get bad loan terms. The CRL found that more than half of black borrowers were charged kickbacks, compared with 31 percent of white borrowers.

The bottom line: Car dealerships sell financial products, not just cars. It makes sense that they would come under the purview of the new Consumer Financial Protection Agency, a rule-making body created by the financial regulatory reform bill.

But they won’t. President Obama has walked back his promise to veto the bill if auto dealers are exempted. And yesterday, House and Senate negotiators agreed to exempt them. “The political reality is that those of us who have fought against an auto dealer carve-out can’t prevail,” Rep. Luis Gutierrez (D-Ill.) said.

Instead, Senate Democrats have proposed holding auto dealers to CFPA regulations through a Federal Reserve-enforced “truth in lending” rule. The Federal Trade Commission would have authority over auto dealers. The CFPA would have no direct oversight, except over a few big companies that provide their own financing, like CarMax.