By on May 12, 2010

President Obama has weighed in on a crucial matter facing legislators attempting to overhaul America’s financial system: whether or not auto dealer finance should be subject to regulation by the new Consumer Protection Agency. Unsurprisingly, he has come down on the side of regulation, specifically echoing concerns voiced earlier by the Pentagon. The National Automobile Dealers Association has vowed to fight attempts to regulate dealer finance.

Statement by President Obama on Financial Reform
Throughout the debate on Wall Street reform, I have urged members of the Senate to fight the efforts of special interests and their lobbyists to weaken consumer protections.  An amendment that the Senate will soon consider would do exactly that, undermining strong consumer protections with a special loophole for auto dealer-lenders.  This amendment would carve out a special exemption for these lenders that would allow them to inflate rates, insert hidden fees into the fine print of paperwork, and include expensive add-ons that catch purchasers by surprise.  This amendment guts provisions that empower consumers with clear information that allows them to make the financial decisions that work best for them and simply encourages misleading sales tactics that hurt American consumers. Unfortunately, countless families – particularly military families – have been the target of these deceptive practices.

Claims by opponents of reform that this legislation unfairly targets auto dealers are simply mistaken.  The fact is, auto dealer-lenders make nearly 80 percent of the automobile loans in our country, and these lenders should be subject to the same standards as any local or community bank that provides loans.  Auto dealer-lenders offering transparent and fair financing products to their customers should welcome these reforms, which will make their competitors who don’t play by the rules compete on a level playing field.

We simply cannot let lobbyist-inspired loopholes and special carve-outs weaken real reform that will empower American families.  I urge the Senate to continue to defeat the efforts of special interests to weaken protections for all American consumers.

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40 Comments on “Obama: Dealer Finance Must Be Regulated...”


  • avatar
    mtymsi

    In theory I agree with Obama’s stance. In reality dealer finance contracts are already subject to the same disclosure laws any other lenders contracts are. It is also worth noting that the majority of car buyers are classified as subprime meaning they don’t really have an alternative to dealer arranged financing. And of course subprime borrowers always pay higher interest rates so without knowing the details of proposed legislation I don’t know what effect it would have on dealer arranged financing. This much I do know, a subprime car buyer given the choice between dealer arranged financing and no financing will opt for the dealer arranged financing every time.

    Another point to consider is dealers usually have the option of signing recourse to get a deal approved. Signing recourse means the dealer is responsible if the buyer defaults. Obviously dealers deserve additional profit in the form of increasing the APR for taking this risk. It kind of sounds like in a roundabout way the end result of this legislation will be to limit credit availability to subprime buyers.

    • 0 avatar
      dkulmacz

      …dealer finance contracts are already subject to the same disclosure laws any other lenders contracts are.

      Based on his statement, it sounds like “auto dealer-lenders” could be exempt from future regulations. Banks will have to start living within much stricter rules, but ad-l’s will not.

      I don’t know if that’s accurate, but how I interpreted his statement.

  • avatar
    Lumbergh21

    I’m sure they will then lean on dealers to provide financing anyway at “fair” rates through charges of discrimination, removal of federal bucks from the manufacturers and their financing arms, etc.

  • avatar
    don1967

    Before jumping to the call that yet another aspect of our lives “must be regulated” by government, let us remember that it was government which manufactured the financial crisis in the first place.

    It was government which directed the mortgage industry (through Freddy and Fannie) to make everyone a homeowner, with no risk of failure. When Big Brother is backing you up, why not go for broke? The sickness spread to Wall Street, where institutions were deemed “too big to fail” no matter how reckless their transactions. They reacted naturally, and as a result they too “must be regulated” now.

    So go ahead, government, and twist the free markets into a pretzel if it helps you justify increased regulation. My only question is, who is going to regulate you?

    As for the slimy practices of some car dealers, ever hear of Caveat Emptor? Education is the answer; not regulation.

    • 0 avatar
      psarhjinian

      Um, no. Government most certainly did not build an entire fabricated economy based on assets that did not exist. That was industry.

      I’m amazed at the snow-job the very rich have pulled on the middle- and lower-class right wing.

    • 0 avatar
      MikeAR

      Psarhjinian, in your eagerness to push your agenda you either ignore facts or lie, which is it? You ignore the CRA, Frank’s and Dodd’s pushing to expend the role of Fannie and Freddie and everything else your Socialist heroes did to promote the subprime crisis. Industry went along with it whole heartedly because they made so much money which was then given to the Democrats in return for more money. But when it is said and done the whole mess was 100% the fault of the thieves in Congress, almost all Socialist Democrats.

      So are you lying or ignoring that fact?

    • 0 avatar
      mythicalprogrammer

      Wut? >_> They, Goldman Sachs, made bets on bad loans while selling the bad loans as good loan. Banks gave out loans to people that can’t really afford it. I doubt that’s government involvement. The only involvement the government have, that I know of, is de-regulations (Bush and Clinton administration) and they encourage first time home buyers with incentive (if that’s a bad thing…).

      This went down during the Bush Administration and Obama is inheriting this now. Didn’t the Republicans had 8 years in office? I doubt this was cause by Obama in one year. Most likely a culmination of both parties but I believe it’s mostly the Republicans that fell asleep when this financial crisis happened.

      “Geeze, Mike, did a socialist run over your dog or something?”

      No, they banned him from the public library. Ever since then, he hated socialists and social institutions. =P

    • 0 avatar
      psarhjinian

      So are you lying or ignoring that fact?

      Geeze, Mike, did a socialist run over your dog or something?

    • 0 avatar
      don1967

      @psarhjinian,

      Um, Yes.

      http://www.nytimes.com/2008/12/21/business/worldbusiness/21iht-admin.4.18853088.html

    • 0 avatar
      MikeAR

      You didn’t answer my question, do you know what the CRA is? Will you admit that Barney Frank, Chris Dodd and others expanded the reach of Fannie and Freddie in return for massive campaign contributions? Congress loosened regulatory controls on banks for and the banks opened up their purses and hired connected people for do-nothing jobs.

      As far as Goldman and the other big banks, they are so interconnected with the Democratic Party and government tat there is no difference, they are all corrupt and ought to be in prison.

      So why didn’t you answer my question? You know I’m right and you were lying.

    • 0 avatar
      MikeAR

      Mythicalprogrammer, I’m a hell of a lot smarteer and better informed than you because I am not a close-minded bigot.

    • 0 avatar
      don1967

      @mythicalprogrammer,

      Wall Street wrote the bad paper, but government backing (the too-big-to-fail mentality) is what emboldened them to do it. It was an artificial environment, with unlimited profit potential and zero downside risk.

      PS: May I suggest that the left-leaning members of this forum give the right-wing-as-neanderthal cliche a rest? It’s getting tired. You do not have a monopoly on intelligence.

    • 0 avatar
      psarhjinian

      Yes, Mike, I know what the CRA is. I figured I’d spare us the debate on this since this isn’t thetruthaboutdebt.com.

      Suffice to say most pundits with an axe to grind against the Democrats finger the CRA because it suits their ideology, while actual economists, bankers and, well, the people who sold the economy up the river in the first place don’t really believe it.

      Making bad loans is one thing, and yes, F&F did do this, though they were by far not the largest source. Hocking that poisoned debt as some kind of asset? That was pure industry.

      Do we really want to have a linkfight about this? Really? Because that’s what it will degenerate into.

      Oh, and for reference, actual socialists would be taking a far harder line on this than Obama et al are. There would also be talk of how the machine is oiled by the blood the underclasses, perhaps a few mentions of “bourgeoisie”. In my experience there would be goatees, poetry and no one would have a job, but YMMV.

    • 0 avatar
      geeber

      I keep hearing how this crisis was caused by “deregulation,” but every time I ask for an example of actual deregulation (i.e., the repeal of an existing statute or regulation), 99 percent of the time the answer I get is the Gramm Leach Bliley Act, which actually ameliorated the crisis.

      It was the government that initially forced lenders to revise their lending standards to allow people with poorer credit ratings to get mortgages.

      The fact that financial institutions found a way to make money off of this trend, and this, in turn, fueled a speculative boom in both commercial and residential real estate, doesn’t mean that the present crisis was caused by deregulation.

      Will there be some new regulations written in response to the 2008 financial meltdown? Sure…new technologies and changing markets have brought about new financial products, and we have to ensure that our regualtory system can supervise them.

      But a big part of making sure that this doesn’t happen again will be encouraging banks to only lend to people who can actually afford to pay the money back. And making sure that riskier customers get charged higher interest rates. That’s not “discrimination” or “hurting the poor.” It’s called a “sound business practice.”

    • 0 avatar
      shiney2

      Blaming CRA is total nonsense. The actual default rate on loans did not spike up until after the economic collapse already started, and initially most mortgage defaults were on high priced secondary houses, in other words, house flippers.

      The banking system started freezing up when it became evident that no one knew the real value or risk in the billions of dollars in leverage (bets) created by derivatives. There is plenty of blame to go around, but the fraud and conflict of interest by the rating agencies and uncontrolled wall street gambling in the form of derivatives were far far more problematic than anything related to the CRA.

      Beyond that, I’m going to go further and suggest that the whole idea of lowering the capital gains tax is also partly to blame. In effect, by having a capital gains tax that is lower than the earned income tax rate, we make it more profitable to gamble with money than to work for money – encouraging investment bubbles, fraud, and vastly increasing the advantage of existing wealth over those working to become wealthy. It takes capitol to gamble with capitol, and those with it now have around a 15-20% tax advantage over those without (I am referring to the working middle class not the subsidized poor). This advantage increases geometrically with the amount of capitol available, so the incomes of very rich rapidly pull away from the merely rich, who slowly pull away from the upper middle class. This effect creates a middle class that now owns less of the countries wealth, making more and more of the population effectively poor. Since broad based demand drives the economy, the country itself becomes less economically viable. Trickle down economics only works in a capital restrained economy, something the US has not been in decades. Applying it to our current economic situation is little short of suicidal.

      Whew! sorry for the somewhat off topic ramble… I was suddenly feeling very passionate about these concepts.

    • 0 avatar
      geeber

      Why were people flipping houses in the first place? Because of a speculative boom in real estate, fueled by very easy credit. Which spurred price increases, which put more houses out of reach of most people, which, in turn, fueled the demand for even more exotic loans. And too-easy credit had its seeds in efforts to expand credit availability back in the 1990s.

      Taxes on capital gains from the sale of a residence – as long as the capital gains were below $250,000 – were abolished completely in 1997.

      That is the real problem, not the fact that other forms of capital gains are taxed at a different rate than income.

      This unequal treatment of capital gains further encouraged the speculative boom in real estate.

  • avatar
    dwford

    The dealers don’t set the rates, the banks do. Dealers are allowed in many states to markup the rates, and it used to be a free for all, but now most states regulate the amount of the mark up. Usually the marked up dealer rate is comparable to slightly higher than a bank rate, but the consumer can negotiate it down by getting pre-approved at a bank first and making the dealer beat the bank rate. Since the dealers make money initiating the auto loan contracts, they have the incentive to keep the financing in house.

    Where the dealers can gouge the consumer is by claiming that the bank “requires” the customer to purchase a warranty or GAP insurance as a condition of the loan approval. This, of course, only happens to subprime borrowers because people with good credit know that such a claim is BS. The dealers make tons of money on these extras.

    Consumers need to read what they are signing, it is a contract after all. It is not uncommon for a dealer to make $0 on the car and $3000 on the financing. It’s where the real money is at.

    I am always amused at the customers who want our best “cash” price. We don’t want cash customers! In reality, we will give them a lower price if they finance.

  • avatar
    Revver

    Don1967, while the general points of Freddie and Fanny making massive mistakes are certainly true, the fact of the matter is those mortgage failures merely triggered an economic downturn, the genuine economic collapse occurred when a severely under-regulated Wall Street was caught with its pants around its ankles when gazzilions of dollars worth of “dooms day” financial products revealed their true worth.

    • 0 avatar
      don1967

      @Revver,

      I don’t deny that Wall Street was caught with its pants down. My point is simply that the reason the pants were so far down is because government took away the downside risk with its too-big-to-fail mentality. CEOs need the risk of failure if they are to behave rationally.

      Both Bush and Obama are guilty of fostering this artificial environment. In conjunction with the credit bubble (another government-fed monster), it is the root cause of the financial meltdown.

    • 0 avatar
      Sinistermisterman

      “Both Bush and Obama are guilty of fostering this artificial environment. In conjunction with the credit bubble (another government-fed monster), it is the root cause of the financial meltdown.”
      I’d agree with that, but I think a lot of people are missing the final guilty party – the people who bought the houses. Without the millions of people who took out the mortgages, this bubble wouldn’t have happened. I know people want to own their own house, it’s the American dream – but at what cost?
      Personally I stayed out of the housing market unlike some friends of mine who are now up to their ears in debt with a worthless house.
      The temptation to buy into the market was very great, watching house prices go up week after week, but I made the choice not to jump on the bandwagon, my friends jumped on and promptly rode over the edge of the cliff with everyone else.
      Blaming Wall Street and the Government is all very well, but it’s also the fault of all those who thought that buying into the housing market was ‘a sure thing’ when it sure as hell wasn’t.

  • avatar
    afuller

    I have to wonder if this is referring to the “buy here pay here” dealerships.

    Some of those rates are usury.

  • avatar
    mythicalprogrammer

    Dealer Financing? Bah! Go credit unions they’re much better! Thx Teddy!

  • avatar
    zigpenguin

    I’m generally in favor of things that reduce information asymmetry. People don’t buy cars very frequently, so they don’t know all the tricks that lenders can use to manipulate them. Lenders do this stuff everyday, so they know the terms very fluently and can take advantage of customers. This is true in lots of industries.

    I think that some regulation can actually benefit business. If taking advantage of the customer is against the rules, it provides greater certainty to customers and a more pleasant experience of buying a car. This can lead to more customers buying products more often, increasing the size of the industry as a whole. If that increase is enough, it can outweigh the costs of the regulation.

    An industry reputation is a commons. Individual actors can take dishonest actions that are beneficial to themselves (and more beneficial than dealing honestly), but hurt the industry reputation. If too many individual actors take these actions, the industry as a whole suffers due to its reputation and all actors lose. This is the classic tragedy of the commons. The way to alleviate it is by adopting rules that regulate the actions that hurt the industry reputation.

    Whether this argument applies to this legislation is something I don’t know.

  • avatar
    Contrarian

    SO car dealers prey mainly on military families? Where did he pull that out of?

    Man, this guy Obama sure is divisive.

    And what’s he implying about military people? About what we’d expect I guess.

  • avatar
    NorthwestT

    Yeah, unfortunately military personnel have been a target of unscrupulous lenders. It’s a huge problem, and when you really think about it it’s a security risk as relates to troop readiness, not to mention vulnerability to spying. It doesn’t really have anything to do with who is president.

    this is just the most recent story: http://www.nytimes.com/2010/05/12/business/12dealers.html?ref=todayspaper

  • avatar
    MikeAR

    Psarhjinian, you started the posting about the evils of capitalism, I just called you on the garbage you posted. Both parties are respnsible for the crisis, but Democrats much more so and most of Wall Street ought to be lined up and shot, Also, you do know that overwhelmingly Wall Street political donations go to Democrats don’t you? They got their money’s worth, protected from threir failures by my tax dollars. It came out today that for the first time ever Goldman had no daily trading losses in the whole of last quarter. Wall Street isn’t a casino, the game has been rigged in their favor.

    • 0 avatar
      NorthwestT

      Mike, I agree with you that it’s definitely rigged. But this goes a long way back. Obama (and Hillary Clinton) raised more money from Wall Street than McCain, but Bush raised more than Kerry in 2004 (I seem to remember that he raised 4x more). But this goes back at least to the Reagan administration if not Carter too.

  • avatar
    Robert Schwartz

    I don’t quite understand what the fight is about. Dealer financing is currently subject to detailed state and federal regulation. How that would change under the proposed bill is unclear. I thought the change was that the new commission would administer the existing federal law (e.g. TiL), which was previously in the hands of the Federal Reserve.

    For banks regulated by the Fed this makes a difference, for other entities it shouldn’t. At any rate car dealers are, or should be, immune from credit regulation. They can always jack the cash price up to get the payments they want, especially for used cars, which is the major focus for this debate.

  • avatar
    jpcavanaugh

    I think we can all agree that the financial crisis was not caused by underegulated buy-here-pay-here car lots. Whether they should be regulated differently is a good discussion to have, but I don’t see the purpose of pulling them into a one size fits all solution to a problem that they did not cause.

    The case against car dealer regulation goes, as I understand it, like this. This bill will increase compliance costs for the smallest lenders much moreso comparatively than it will for the big players. Also, the big players will be much more likely to receive bailouts in the future if things go bad, because they are too big to fail. Small lenders will not get this protection. Therefore, big lenders get a cost advantage, and can be more aggressive. This tilts the playing field in favor of the big lenders and against the small ones. If someone has a better understanding of the merits of the argument, please correct me.

    One thing that I am getting weary of is Mr. Obama’s habit of treating anyone who disagrees with him as either being ill-informed or having bad motives.

  • avatar
    jimble

    @jpcavanaugh: Thanks for summarizing the argument against this regulation. It’s a legitimate point, but I think everyone — customers and lenders alike — would ultimately benefit from clarity and transparency. If lenders didn’t make such complex and opaque financing offers they could probably reduce their compliance costs at the same time that they improved customer satisfaction.

    As for the president “treating anyone who disagrees with him as either being ill-informed or having bad motives” — are you serious? I agree that it’s annoying, but it has been a favorite rhetorical tactic on both sides of the aisle for centuries.

  • avatar
    cardeveloper

    I take a slightly different tact, THROW ALL THE BUMS OUT. Democrat and Republicans have this dangerous sense of entitlements, and combined with the bastardized election funding process, we have a mess on our hands.

  • avatar
    folkdancer

    After retiring I wanted something to do and starting working for one of the big tax preparation outfits. Poor people often got most of the money they had paid in taxes during the year refunded. Many single mothers got all their withholding back. We offered to give them their refund the next day and a great many of my customers took this option.

    But we charged them 250 to 300 PERCENT interest on these loans! I often explained to my customers that if they waited only 10 to 14 days they would get their full refund but because of extreme necessity or extreme hurry to buy something they ignored our interest charges and requested their refund (or what was left of it) the next day.

    I felt sad for and angry at my clients. I couldn’t stomach hurting these poor people and quit.

    We shouldn’t need to have regulations of banks, car dealers, furniture stores, and tax preparing outfits but if people are desperate or stupid the short sighted greedy will take advantage of them.

    Those of you who enjoy yelling “socialism” every time the government steps in with new laws should realize that socialism is a reaction to a very few getting rich when the government doesn’t protect the poor and the sinking middle class, perhaps even from themselves.

    • 0 avatar
      Robert Schwartz

      You can’t protect people from used car dealers. They don’t have to charge interest at all.

      Customer: How much is that car?

      Note Lot Dealer: $12,000 cash or 60 easy payments of $200.*

      Customer: But I can buy that car for $7,000 at Cash Cars down the street.

      Note Lot Dealer: Go down the street and do that.

      Customer: But he won’t finance.

      Note Lot Dealer: I wouldn’t finance at those prices either.

      Customer: OK. How much is the car?

      Note Lot Dealer: $12,000 cash or 60 easy payments of $200.

      Customer: Where do I sign?

      *23.66% APR

    • 0 avatar
      geeber

      Except that in real life, socialism tends to make everyone poor. If you value egalitarianism over everything else, I guess that is good.

    • 0 avatar
      shiney2

      Pure capitalism, without some form of government oversight is also guaranteed to fail. The long term success of a country depends on a balance of pragmatic ideas.

    • 0 avatar
      geeber

      Capitalism has a boom-and-bust cycle. That is not the same as failure of the entire system. If anything, it can help weed out the rotten apples. As someone once said, “Depressions uncover what the accountants missed.”

      The key is making sure that the depressions are short – unlike what we did in the 1930s, when first Hoover, and then Roosevelt, made what should have been a short and sharp depression into the Great Depression.

  • avatar
    MikeInCanada

    Let’s bottom line this one….

    After screwing over millions of thousands registered voters they have brought this upon themselves.

  • avatar
    Rick Korallus

    I’m kinda surprised that it took this long for this subject to come up here. We’re regulated to the tooth already. Where are the AG’s that should be prosecuting the scheisters that are taking advantage of our military personnel? Why can’t I type a single word without the error message of “we don’t know what we have here”? Why aren’t the AG’s enforcing the existing laws? The Brownback Amendment DOES NOT EXCLUDE BUY HERE PAY HERE lots. We are capped at 2% mark up of interest rates. When the manufacturers subsidize finance rates, we receive $100.00, depending on who the captive is. On the rare occasion that we do a sub-prime deal to someone who is unworthy of getting financing through banks and credit unions, the banks’ charges to us, which we are forbidden to pass on to the consumers, is almost always four figures. That barely leaves us enough to pay the salesperson’s flat $100 commission. Forget about covering their salary, healthcare, 401k match, and all the other over head that goes into a new car store. If you think that the paperwork process takes too long already, it’s because the majority of us who are honest, law abiding dealers are following the law. Another layer of regulation will not speed things up any. A lot of dealers give back to their communities but I never hear any complaints about that.

    Here’s what NADA has to say today, read carefully:

    Auto Dealers Take Issue with Misleading Statements from White House on Financial Reform

    WASHINGTON – NADA Chairman Ed Tonkin issued the following remarks yesterday in response to a statement from President Obama on financial reform:

    “Sadly, the White House is continuing to issue misleading statements in its efforts to get auto dealers wrongly included in Wall Street reform legislation. Much of what’s included in its latest statement is pure fiction.

    “For example:

    1. It urges senators not to support the Brownback amendment because financial reform needs to include ‘auto-dealer lenders.’ But the Brownback amendment does not exempt auto-dealer lenders. Any dealer, bank, credit union or other finance company that actually underwrites and funds auto loans would be subject to the proposed consumer protection agency. And we’re absolutely fine with that. What we don’t support is including auto dealers who simply assist customers to find auto financing. These dealers are not banks. They are facilitators. And dealer-assisted financing is already heavily regulated – and should not be subject to double regulation.

    2. The enormous set of consumer protection laws that currently governs dealers will be preserved under the Brownback amendment. Despite what the Administration suggests, unfair and deceptive practices are currently illegal and would remain so if the Brownback amendment is passed. Moreover, all of the laws that dealers are currently subject to (e.g., Equal Credit Opportunity Act, Truth In Lending Act, Federal Consumer Leasing Act, Fair Credit Reporting Act, Gramm Leach Bliley Act, Federal Trade Commission Act) would still exist and apply to dealers if the Brownback Amendment is approved.[1]

    “At the core of the Administration’s attack on dealer-assisted financing is the assertion that dealers routinely place consumers in ‘loans with higher interest rates than the borrower qualifies for.’ This statement is patently false. What’s worse, it manifests either an inability or a refusal on the part of the Administration to recognize how the market, which they claim needs more regulations, actually works.

    “Dealer-assisted financing – which is always optional – regularly affords consumers more favorable terms than those available through other sources. Yet, the Administration seeks to subject dealers to an agency which is being directed to create an uneven playing field by declaring off-limits for dealers practices that will be preserved for community banks, credit unions and other direct lenders.

    “For the President, in the statement attributed to him, to malign an entire industry made up of Main Street businesses run by dedicated men and women and their employees is shocking. We urge senators to resist this latest round of scare tactics and vote in favor of the Brownback amendment to preserve affordable auto finance options for consumers.”
    [1] The Brownback Amendment specifically states that, “nothing in this section shall be construed to modify, limit, or supersede the rulemaking or enforcement authority over motor vehicle dealers that could be exercised by any Federal department or agency on the day before the date of enactment of this Act.”
    Source: NADAFrontPage.com

  • avatar
    Rick Korallus

    Oops, I almost forgot my political remarks: this pitting of military against car dealers is another example of the government’s attempts of dividing us to conquer us. That said publicly, now I’m probably on some watch list…


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