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Car dealers may be affected by crackdown on Wall Street

By Claes Bell, CFA · Bankrate.com
Thursday, May 13, 2010
Posted: 2 pm ET

While following the financial reform legislation currently winding its way through the Senate, one seemingly unlikely but vocal opponent jumped out at me: car dealers. An article in The Wall Street Journal says that car dealers don't like the idea of the proposed Consumer Financial Protection Agency, or CFPA, having jurisdiction over their lending practices.

The dealers' trade group, the National Auto Dealers Association, or NADA, argues that the purpose of the bill is to prevent another Wall Street-led collapse of the economy, and because dealerships didn't play a role in the financial crisis, they shouldn't be included. And that dealerships are already regulated enough by the FTC and the Federal Reserve Board, thank you. 

On the other side of the fight is an even more unlikely opponent: the military. They're angry about how dealers have treated military personnel in the past, arguing that predatory lending by car dealers has "hurt military readiness." The military want strict oversight in the new financial regulations and are lobbying senators hard to prevent an exemption for dealers (sponsored by Kansas Sen. Sam Brownback) from making it into the final bill. Brownback's bill would exempt new-car dealers but would still regulate sketchy "buy-here, pay-here" dealers and financial institutions that actually make car loans.

I'm torn on this one. The finance and insurance room, or F&I room, can be a scary, high-pressure place sometimes, and the potential for predatory lending there is every bit as high as in a mortgage broker's office. On the other hand, it may be enough to have the CFPA oversee the institutions offering the loan products dealers can sign you up for, sort of like the FDA regulating the production of your Doritos, but not the convenience store that sells them.

What do you think?

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6 Comments
Claes Bell
May 14, 2010 at 9:52 am

Bill raises an interesting point. Here's the text of the amendment: http://www.kstreetresearch.com/documents/050410Amendments/BROWNBACKAMENDMENTSA3789.pdf ... the problem I see with it is the "routinely" here: "(A) the extension of retail credit or retail leases is routinely provided directly to consumers; and
(B) the contract governing such extension of retail credit or retail leases is not routinely assigned
to a third-party finance or leasing source." I'm no lawyer, but that seems like a loophole big enough to drive a dealer-financed truck through. And I think it's not entirely accurate to compare dealer financing options to something like Lending Tree. The range of financing options I've encountered at dealerships is much narrower than that. Am I wrong in thinking that many dealers receive incentives from a lender to do the majority of their business through that one bank? If that's the case, then dealers aren't really the impartial brokers you make them out to be.

bill buckingham
May 14, 2010 at 9:39 am

The President and those quoting Pentagon officials out of context continue to display their apparent confusion over who and what the Brownback Amendment exempts. The "shady car dealers that set up shop just outside many bases." are typically Buy Here Pay Here operations that DO in-house lending. This form of "dealer lending" IS NOT exempted under the Brownback Amendment. Franchised Dealers rarely, if ever, do in-house lending. If they do, that portion of their business is not exempted by the Brownback Amendment. The vast majority of franchised dealers provide a service to the consumer by facilitating and aggressively negotiating the best loan terms from an outside lender that they can get for their customers (think "Lending Tree"). Many of these customers are unable to get a loan on their own. If this Dealer Assisted Financing model goes away, it is these consumers who will suffer the most.

Brownback Amendment is Pro-Consumer and Pro Main Street

Ed Baker
May 14, 2010 at 7:20 am

Meagan - Did your cousin ever hear of the word "no?" Did your cousin ever think of buying a used car instead of a new one? Did your cousin ever do the math as to what the payments and car would cost him?

I didn't buy my first brand new car until I was 40 years old. My grandfather bought his first new car when he was 60. Guess what - we both paid cash.

As far as cars go - I would be happy if they outlawed car loans all together and made everyone pay cash. It's a depreciating asset. It's a poor decision to use credit to buy anything that depreciates. What depreciates faster than a new domestic car?

All hail the nanny state! Save us from ourselves! We can't say no to our own vanity!

Ed Baker
May 14, 2010 at 7:16 am

As "one of the good ones" (mortgage brokers) - I am really sick and tired of comments like this that give the idea that all mortgage brokers are somehow crooked. Our shop has done 99% fixed rate conventional loans, with no prepayment penalties, no balloon payments - etc. This bill is going to put small BANKS and mortgage brokers out of the mortgage business. The end result will be that consumers will pay more for their mortgages.

Mortgage brokers didn't invent credit default swaps, and we didn't invent no doc loans, and we didn't invent NINA loans, or neg am loans. Our shop didn't even use these loans. Our local population buys real estate with the idea of paying it off one day. We weren't subject to the wild speculative fever pitched buying. Our real estate didn't appreciate at 40% a year. Why? Our local population wouldn't pay those prices. They won't stretch to buy houses they can't afford.

Henry
May 13, 2010 at 7:46 pm

Yeah,

I'm afraid that that broad a mission would require staff and systems that aren't present or budgeted. Probably better to clean up the lending institutions. Leave it to local and state officials to do that but helping them with a pipeline to complaints from military personnel, information sharing, and funding.

Henry

Meagan
May 13, 2010 at 4:26 pm

I have a cousin who is in the military who got into a LOT of financial trouble with a car loan. One of the major reasons he re-enlisted was so he could pay off this brand new Jeep. Before you can take out a student loan, you have to go through a lot of counseling and it takes weeks to get a mortgage, but you can walk into a car dealership and walk out three hours later $30,000 (or more) in debt. I think there should be some kind of regulation or counseling that goes on, or at least a "waiting period."