Cars and loans and consumers
As the Senate debates a bill to overhaul financial regulations, its backers have fended off a series of attacks on one of its centerpiece reforms: a new consumer protection agency. Still, opponents of the Consumer Financial Protection Agency keep trying to narrow its reach, contending that it threatens to make vital forms of credit less available and more expensive.
A critical test for the new agency is expected this week, when the Senate takes up a proposal by Sen. Sam Brownback (R-Kan.) to exempt most automobile dealers from the new agency’s rules. The dealers’ trade association, which backs the amendment, says its members are simply intermediaries who offer consumers another option for financing their purchases. That’s true, but it misses the point of the bill — and the unmistakable lessons of the housing bubble.
The rationale for a new agency is that neither market competition nor the current set of regulators is enough to protect consumers from being duped or gouged when they obtain a loan or other financial product. The push to create the agency is a testament to the sorry state of financial literacy in this country, as well as the ridiculous complexity of the terms that banks, insurers and the like are imposing on their customers. It also responds to the low priority that consumer protection gets from the Federal Reserve and other financial regulators, whose main concern is the banking system’s safety and soundness.
Although few auto dealers actually lend money to their customers, they are an integral part of the process of matching lenders to borrowers. As analysts with the Cambridge Winter Center for Financial Institutions Policy noted, “Far from being passive administrators with respect to auto finance, auto dealers actively market and price borrowers’ loans.” And as profit margins on car sales have shrunk over the past decade, dealers have come under more pressure to generate higher fees from the loans they persuade buyers to take.
The fundamental problem for consumers is the same with dealership car loans as it was with mortgages during the housing boom: The company offering the loan makes its money off the transaction, so it doesn’t care whether the borrower gets the best, most affordable terms. Competition among dealers provides some protection, yet it’s an imperfect shield; according to the Center for Responsible Lending, loans arranged by dealerships are “the No. 1 source of complaints received by the Better Business Bureau and state and local agencies.”
Given the role the dealerships play in selling loans along with their cars, it doesn’t make sense to exempt them from the new agency’s purview. It would only give them and their partners — the big banks and securities dealers that provide the funding for the loans — a regulatory advantage over the community banks and credit unions that hold a much smaller share of the market. Dealerships are right to argue that they shouldn’t be subject to burdensome rules, but that’s an argument about how they should be overseen, not whether they should be.
