Letter to Washington: Consumer Financial Protection Agency needs to govern all car financing

Following the meltdown in financial services last year, the Obama Administration wants to launch a Consumer Financial Protection Agency as a watchdog over consumer financial products. As progress is made in Washington, D.C. on a bill to create this agency, one contentious area on Capitol Hill revolves around whether car dealerships, where many car loans originate, should be subject to the new rules and regulations of the agency on lending. (Learn more about the Consumer Financial Protection Agency.)
 
A high level of complaints about auto dealerships, typically related to predatory lending practices at dealerships, is driving the need for oversight. Such issues are ranked number one among consumer complaints lodged with state and local consumer protection agencies, according to an annual consumer complaint survey by the Consumer Federation of America and other consumer groups.
 
About 94 percent of new car sales involve financing, according to the National Automobile Dealers Association (NADA). According to a report by CNW Marketing Research, an automotive marketing firm, 85 percent of those Americans who have a car loan have negative equity in their vehicles. Other studies have pegged this negative equity at an average of $4,400.
 
Now several consumer groups, including Consumers Union, which publishes Consumer Reports, have signed on to a letter to Rep. Barney Frank (D-MA), asking him to ensure that the bill includes dealer financing.
 
Car dealers predictably oppose the measure (PDF). They argue that loan transactions are already regulated by the Federal Trade Commission, the Federal Reserve Board and all 50 states. And they point out that auto financing was not among the factors that lead to last year’s credit collapse.
 
NADA spokesman Bailey Wood told the Detroit News that "payment packing, misrepresenting fees, falsifying loan applications, forgery, etc., are already illegal,” implying that they don’t need further regulation.
 
The letter signed by Consumers Union and others cites several dealer practices that the Consumer Financial Protection Agency (CFPA) needs to regulate to protect consumers, including:

• Selling retail installment contracts to lenders.
• Engaging in bait-and-switch financing, also known as "yo-yo" financing.
• Engaging in "loan packing" -- misrepresenting the costs to finance over-priced add-ons.
• Forging loan documents and/or signatures.
• Failing to pay off outstanding liens on traded-in vehicles, as promised, a.k.a. "car kiting."
• Charging excessive, hidden dealer "markups" of interest rates.
• Price gouging by Buy-Here-Pay-Here lots, where dealers carry their own finance paper.
• Engaging in other predatory lending practices.

 
There is also a fairness issue – the bill will cover banks, credit unions, and finance companies when they make car loans. It should also cover dealer loans.

Consumer Reports has long stated that paying cash for a car is the most cost-effective way to buy. For those who finance, it is important to shop for the best interest rate and secure a loan prior to visiting a car dealership to ensure it is the consumer who is driving the deal. That advice has never been more relevant. (Read: "Watch for these sales pitches.")

The House Financial Services Committee, which Rep. Frank chairs, is due to begin marking up the bill today.

Watch the Consumers Union video on the Consumer Financial Protection Agency.

Learn more about new car buying.

—Eric Evarts