The fat lady hasn’t sung yet, but the country’s auto dealers have
been exempted from the financial reform bill now in its final stage in
Congress. Given that the purpose of the bill is to protect Americans
from harmful manipulation by the people selling them financial products,
this is a pretty stunning development. The nation’s auto dealers either
provide or broker most of the $850 billion worth of currently
outstanding car loans across America. That’s a pile of financial
product: It’s more than household credit card debt and second only to
Many of the home finance industry's
unethical practices were mirrored by the nation's auto dealers, but the
regulatory response has left the car loan market untouched.
year, 50 million people buy a car, and 94 percent of those sales are
loan-financed, to an average tune of over $28,000 for a new vehicle. At
both new and used lots, a good number of those loans involve unethical
and fraudulent practices. Like the mortgage industry, dealers have
pushed credit and pricey products on people who couldn’t afford them,
and then fudged paperwork to make it appear they could. They offered
"zero interest and no money down" and extended loan terms from what was
until recently an average of three or four years to seven and even eight
years, leaving huge numbers of car owners "upside-down" on their loans
-- which is to say, owing more than their car is worth.
More egregiously, their business innovations -- not advertised as such,
of course -- include such activities as “power-booking” (reporting to
lenders that a car is equipped with non-existent options, thereby
raising the amount of the loan) and “yo-yo financing” (a form of bait
and switch, in which car buyers leave a down payment or trade in their
car, drive off the lot, and then are falsely told that the financing
"fell through" and that they have to pay a higher interest rate, often
under threat of repossession or arrest).
The list goes on. Dealers regularly get kickbacks and markups from
other lenders. Car loans have been packaged and dangerously securitized,
just like home mortgages. Dealers encouraged many car buyers to use
home equity loans to make their purchases, obliterating whatever cushion
they had when home prices plummeted. It’s a jungle on the lot for
consumers, especially the poor and those with poor credit.
recent New Yorker article, James Surowiecki seeks to explain how
the auto dealer exemption could have happened when it is so opposed to
the public interest, and when powerful actors like Citibank and J. P.
Morgan did not escape regulation. He sees it as mostly a public
relations coup, with the dealers presenting themselves as Main Street
plain folks, virtually victims of the financial system themselves. They
also played up the number of jobs dealerships provide in communities
across the nation (how those jobs would dry up if dealers had to make an
honest living was not made clear).
But what wasn’t noted is the power of the car dealers over the press
itself. Read more...