Heading into the final stages in overhauling financial regulations, a joint congressional committee is ready next week to tackle one of the thornier issues — whether car dealers will be regulated by a proposed consumer protection agency.
The joint conference committee is wrestling with the role dealers play in auto financing and the discretion they have to set terms — and potentially take advantage of consumers.
"Car dealers are out there shopping for the best rate for themselves … and they don't pass that on to the consumer," said Tom Domonoske, a Virginia attorney who works on auto financing issues.
Dealers that assist in financing argue they're just middlemen in the process, helping buyers secure the best loans. Abuses are rare and already covered by anti-fraud regulations enforced by state officials and the Federal Trade Commission, the dealers said.
As savvy car buyers armed with online price data and other information have pushed for harder bargains on purchase prices, dealers have tried to boost other sources of income, such as service contracts and auto financing. In some cases, consumer advocates said, they've resorted to questionable tactics.
In need of a car, Sara J. King, 26, of Encinitas in San Diego County went to Toyota Carlsbad with her parents in March to see if she could make a deal. But with poor credit, she found the best interest rate too steep at 16%.
As the dealer was preparing to close for the day, however, King said the finance director made her an offer she couldn't refuse: Drive home in a shiny new white Corolla for $3,500 down with 0% financing.
"They said, 'We'll make it work, we'll make it work,' " she recalled.
They didn't. Ten days after she signed the paperwork and pocketed the keys, Toyota Carlsbad told King that it couldn't find a bank to take the loan and that she'd have to agree to 16% financing.
Rick Bilgrien, finance director at Toyota Carlsbad, said he couldn't comment on King's case.
Consumer groups said King's experience showed the need for more government oversight of auto dealers.
Her case is an example of what the industry calls yo-yo financing: A dealer agrees to a great bargain, then pulls it back a week or two later. The goal is to get the buyer to pay more later to avoid the hassle of returning the car.
"I said, 'No, this is not my fault. You called me days later in hopes I'd love the car and just pay the price,' " King recalled.
She returned the Corolla and got her down payment back.
Bilgrien said yo-yo financing was not Toyota Carlsbad's practice.
Auto dealers are fighting back strongly against additional oversight, which they say is unnecessary and will add to their costs, ultimately driving up prices for consumers.
"They would have you paint the whole industry as doing these devious things," said Ed Tonkin, owner of a group of dealerships in Portland, Ore., and chairman of the National Automobile Dealers Assn. "We don't condone any abuses; we are totally against that."
A potent political force because of their numbers and their community involvement, auto dealers last year successfully persuaded the House in its version of the overhaul of financial rules to exempt them from oversight by the proposed consumer protection agency.
But with strong opposition from the Obama administration, particularly by Pentagon officials who said members of the military often complain about getting ripped off in buying cars, the Senate did not include an exemption in its legislation.
Consumer advocates say auto dealers are overstating their ability to help consumers get good deals from banks and need greater oversight to prevent abuses.
"The finance manager's job is always the same … to get the consumer to sign the contract that puts the most money in the dealer's pocket," said Domonoske, the Virginia lawyer.
Most dealers don't lend money to buyers but assist in matching up buyers with banks. Those that do lend their own money, called buy-here-pay-here dealers, would not be exempted from the consumer agency's oversight under the House bill.
In the rest of the cases, consumers without their own cash or pre-arranged financing through credit unions or other lenders strike their financing bargain with the dealership. In 2007, 79% of auto lending was done through the dealers, according to the Cambridge Winter Center for Financial Institutions Policy, a nonpartisan think thank.
The consumer signs a retail installment contract that specifies the sale price, amount financed, length of the loan, annual percentage rate and finance charges. The dealer then secures the loan at a lower percentage through banks, credit unions or auto industry finance arms, such as GMAC. The dealer makes money on part of the difference between the two rates.
After settlements in a series of auto financing discrimination lawsuits in the 1990s, dealers say they agreed to cap their cut at 2% of the amount financed. California is one of the few states with a legal cap on that difference — 2.5% for loans up to 60 months and 2% for longer loans.
There's nothing nefarious in charging consumers a slightly higher interest rate than the dealers obtain from the bank, and consumers are always free to get their own financing, said Bailey Wood, a spokesman for the National Automobile Dealers Assn.
Even if the House exemption is approved as part of the final bill, all auto loans would be covered by rules set by the consumer agency through oversight of the banks that make them, the dealers association said.
"We're just in the middle, facilitating the loan," said John Symes, who owns three Pasadena dealerships — Symes Cadillac Saab, Toyota Pasadena and Land Rover Pasadena.
But consumer advocates said that middleman description was misleading.
They argued that auto dealers are similar to mortgage brokers — making deals with consumers, pocketing a profit and then selling the loans to banks. Mortgage brokers would be covered by the new agency and so should auto dealers, consumer advocates said.
Auto dealers strongly reject the comparison to mortgage brokers, who helped cause the financial crisis by making shoddy and often predatory loans under the assumption that housing prices would continue to rise.
Jeremy Anwyl, chief executive of auto research firm Edmunds Inc., said consumers need to be careful when financing a car. But dealers perform a service in helping shop for loans and should be compensated for it, he said.
"Frankly, if a person has bad credit and the dealer can get you financing, then they're performing a useful service," Anwyl said.