The next few days of negotiation on the financial regulation bill could have a big effect on your next auto loan. That's because, with the passage of the financial regulation bill through the senate, the Brownback amendment exempting car dealers from the new regulations is frozen out of the senate bill for good. This may seem like a good thing for car buyers, who would have the Consumer Financial Protection Bureau watching over all their lenders and dealers if the senate version prevails. But I think it actually raises the likelihood that some car buyers will get a bad loan in the future.
Here's why: The next step for car dealers is to make sure the exemption, already embedded into the house bill, gets into the final bill that will be worked out between the senate and house versions in what's called a conference committee.
I read over the exemption contained in the house bill (it's in Sec. 4205 of HR 4173), and it's much stronger than the Brownback amendment. Where the Brownback amendment didn't seek to shield "buy here, pay here" dealers that sometimes engage in questionable lending practices, the house bill doesn't seem to make a distinction between dealers that act as intermediaries between banks and customers and those that actually loan the money themselves.
I think not drawing this distinction is a mistake. While I think there's at least some merit to the argument that the many dealerships simply serve as financing intermediaries and shouldn't encounter an extra layer of regulation, there's much less merit to exempting dealerships that are directly loaning money to car buyers.
At least with a conventional auto loan, the financial product itself is regulated in some way by the both versions of the bill at the lender level. But in the case of a buy here, pay here dealer offering a loan, the house bill as written now offers no protection for consumers whatsoever. Why should a buy here, pay here dealer be able to offer a car loan a bank couldn't legally get away with offering?
This strikes me as being worse than the status quo, because it seems to give buy here, pay here lenders an advantage: if only buy here, pay here lenders can offer deceptive and high-risk auto loans that look much better than they are in practice, that would seem to have the effect of pushing more low-income buyers toward them and away from more reputable dealers.
What do you think? Am I off-base here?
Correction: Turns out the house bill does have an "exemption to the exemption" targeting buy here, pay here dealers that make auto loans directly to consumers.