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 home mortgages.
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.
In a 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...