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Financial regulation and your next auto loan

By Claes Bell ·
Friday, May 21, 2010
Posted: 12 pm ET

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.

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Claes Bell
June 04, 2010 at 9:10 am

Just want to say, thanks for the thoughtful comments on this post. I feel really privileged to be writing for such an articulate and sophisticated audience. I think G has a good point in that assuming all buy here, pay here customers are entirely innocent victims in this. He's right in saying the owners of these lots take a substantial risk when lending to their customers, and that they are sort of a lender of last resort in the car business, similar to how the FHA works for the housing market (although on much worse terms). But Concerned is right, too, in the sense that buy here, pay here lots create the same kind of debt cycle that plagues pay day borrowers. These cars often fail years shy of the end of the loan term, leaving the borrower up to their ears in negative equity, especially since they've been paying sky high interest. So if you're an honest person who's trying to recover financially from some calamity and just need transportation, a buy here, pay here loan can be a major stumbling block.

June 04, 2010 at 8:19 am

Heres the real concern. After spending a few years in the business directly, my concern falls in not only the high interest rate (21%) being charged but, the overall mark up of these units. The company that I unfortunately was working for, would mark these units up tremendously. ex: car purchased by the dealer at auction for $3200.00 will go on the lot for $8000.00 to $9000.00. These units were typically in very poor condition. Often times 10 plus years old and would have as little reconditioning as possible. I do understand sub prime lending very well and in my opinion it is a way of taking advantage of people who have seen rough times. Not every customer that comes into a sub prime lender has always had consistantly poor credit. For many of them circumstances in life created the situation they are in. Then they have to spend many years trying to get away from such lending. The unfortunate side is these folks are stuck with this type of lending. As a nation we want to regulate the sub prime real estate and consumer lenders but have neglected to look at these buy here pay here dealers. Poor judgement on our part. These dealers have popped up everywhere and I assure you there are going to be serious ramifications to come because of it.

G Headrick
May 22, 2010 at 10:34 am

I spent several years buying car paper from Buy Here lots and basically acting as the lender for these deals. I got out of it simply because the hassle was too great. These people have lousy credit ratings for a reason and they really aren't looking to buy a car; they are renting it for as long as it runs. The term "predatory lending" is a joke. No one makes out on a repossession as the vehicle is almost always trashed beyond salvage and these "buyers" fully understand the terms - they just don't want to acknowledge them when times get tough.
The option to eliminating Buy Here Pay Here is they walk. In fact the term "sub prime" was used in the car business long before anyone in real estate talked about it.