By on June 24, 2010

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.

This is what president Obama said just six weeks ago about efforts to exclude car dealership financing from consumer protection measures included in the forthcoming Financial Reform bill. With that bill moving towards Obama’s desk, all that stands in the way of its passage are angry dealers who don’t want to be subject to oversight. And despite the tough talk about standing up to financial interests to pass this reform, it seems Obama has caved to America’s auto dealers.

Today, the White House released a statement, reported by Automotive News [sub] that said

The president vowed to fight efforts to weaken this bill and find ways to strengthen it, which is why he opposes carve-outs like this one that would exempt auto-dealer lenders from new consumer protections. While we knew that we’d not win every fight, the president will soon sign into law historic Wall Street reform that includes the strongest consumer protections ever

So, why did Obama speak out against dealer finance’s exemption from oversight if he was willing to cave on it? That, so far, is a mystery. And though the bill does cover a number of important issues outside of the car industry, this is definitely the wrong message to be sending. With GM already looking to subprime loans for sales growth, the temptation to goose sales with ever-riskier and more-exploitative loans, whether on the dealer or OEM level, is undeniable. Sales have been flat since mid-2009, and in the established order of business for the car industry, financial trickery is the first resort of a struggling firm. And if the last two years have taught us anything, it’s that redlining sales with creative lending creates unsustainable growth. If Obama figures less regulation at the dealer level will boost overall sales, helping GM go private and him get re-elected, he’d better consider the possibility of another car sales crash in his second term. And in the meantime, anyone who gets screwed by an unscrupulous dealer will have their president to thank.

Get the latest TTAC e-Newsletter!

43 Comments on “Quote Of The Day: You Can Trust Your Dealership After All Edition...”


  • avatar
    Domestic Hearse

    There’s already resistance to lending, despite efforts to free credit markets. Banks hoard cash now to cover future losses in their mortgage, credit card, business-loan, and auto loan portfolios.

    Now consider that (depending on who you ask, and what their criteria are) fully half of American car-buying consumers are considered non-prime. Or, put another way, below a FICA of 625 (ish). In fact, some banks and manufacturer lending arms won’t touch anything below a 700.

    The argument that was made to the president would be something like this….

    See, this car industry that you spent billions trying to stimulate with cash for clunkers is just starting to show signs of life. And don’t forget, Mr Presendent, that you own, er, the people own Chrysler and GM. Having either of those fail, after the bailouts, is simply not an option.

    Now sir, if you don’t allow the dealers and their financial partners to rip the heads off buyers…er, make appealing returns off the financing of vehicle sales — at least enough to offset future risk — then this fragile industry could come crashing down all around us.

    If you don’t let the dealers and lenders pile on the points in the back-end, the reward won’t overcome risk. And the economy will grind to a halt…

    Oh, shit! Mr President, the containment cap just came off the oil well and crude is pouring out everywhere!

    Look, forget the dealers. Get on Air Force One and get back down to the Gulf and look stern and resolute and ass-kickish.

  • avatar
    tced2

    I am certainly for fair loan terms.
    But the federal government is going to deliver them? From the folks who promote 10,000 pages of income tax regulations? From the folks who encouraged, required, securitized sub-prime mortgages?

    • 0 avatar

      I think that the current credit card disclosures forms require a fairly smart reader to decipher, but they’re better than nothing. Just plain ‘ol fair disclosure would be a big step in the right direction.

  • avatar
    ClutchCarGo

    Oh, please, this is nothing more than standard political sausage making where compromises are made in order to get a bill passed that addresses issues in order of importance and sensitivity. Every congress man and woman has an auto dealer back home demanding exclusion, making the car loan oversight a hurdle to getting some much needed regulation of the financial industry passed. He called for the inclusion of auto dealers in an effort to push back against the carve out. It didn’t work, so he’s moving on. And really, predatory auto lending was hardly the reason that the financial system seized up in 2007-2008.

    • 0 avatar
      Ron

      Insightful comment.

    • 0 avatar
      geeber

      Except, of course, if you listened to his rhetoric during the campaign and his first few months in office, this sort of thing was only done during the bad old days (i.e., the Bush presidency). He would never lower himself to this sort of dirty compromise. His coronation, oops, inauguration, was supposed to be the dawning of some sort of New Age of Mankind. Now it looks suspiciously like more of the same old stuff.

    • 0 avatar

      predatory auto lending was hardly the reason that the financial system seized up in 2007-2008
      No, but it was definitely one of the reasons the auto industry took the financial system crash so badly.
      I agree that this is “sausage-making” but Obama made a fuss about this specific issue and now he’s not holding firm. I also do not understand the argument for excluding one specific type of financial service from otherwise sweeping regulation. I’m not a fan of regulation for regulation’s sake, but if the financial services sector needs a shorter leash, why do dealer loans get a free pass? Because they have such a great reputation?

    • 0 avatar
      Advance_92

      It’s because they have some local and loud friends in the Senate. And probably because since car loans are small time rip offs compared to the obvious problems with mortgages it’s a lesser issue that Brownback can champion without looking like a fool (unlike that rep from Texas last week who tried to apologize to BP during hearings on the oil spill).

      If anything I’ll give the President credit for not being a hardheaded fool who will let things fail because he can’t get his cake and eat it, too. Politics is still the art of the possible unless you’re Fidel Castro or Newt Gingrich (circa 1995).

  • avatar
    1996MEdition

    “And in the meantime, anyone who gets screwed by an unscrupulous dealer will have their president to thank.”

    No, you will have only yourself to thank. What ever happened to personal responsibility? Do not spend beyond your means. Read & understand everything. Do not sign if you do not understand. Save up your cash and buy used from a private party. If you have to, get a $500 clunker from a for a bit….drive it till it dies!

    After stupidly losing big to financing, I vowed never to buy new unless I had the ability to pay cash. Both of my vehicles are +10 yrs old. No payments, low insurance, routine maintenance…..it’s the only way to drive.

  • avatar
    Advance_92

    It’s politics; you don’t always get exactly what you want.

    The only potential downside is if banks start routing all of their loans through car dealerships.

  • avatar
    troonbop

    Let’s not get bogged down in detail and conspiratorial thinking. Announcing the idea was easy and popular…doing it would be kinda difficult and head achy…golf!!!!

  • avatar
    findude

    This was the only possible outcome. If you don’t understand, grab your local newspaper and add up the column inches of ads paid for by car dealers and manufacturers. Then compare that total to the rest of the paper. Scary stuff, eh? Now get a stop watch and spend some time in front of local TV channels. Scary? Yep.

    The truth about cars is that the industry can tell the print and broadcast media what to do and how to cover news. Your newspaper, TV channels, radio stations, and even this blog are all brought to you by automotive advertisers. And, yes, these folks can and do tell congress what to do.

  • avatar

    Predator and prey are not so easy to distinguish. The home loan collapse was fueled by speculative buyers, who knew exactly what they were doing, and who have now dumped property that is well underwater on their lenders. Who’s the predator there? I’m sure the repo-men can tell some tales of auto-finance companies getting cars worth far less then the remaining loan, and writing it down. Underwriting accurately for risk is all you can ask for.

    I would favor the full disclosure requirements, if only to stop idiot consumers from buying far more car (and house) than they can afford. It would also help manufacturers meet the new CAFE standards, as the Ford Focus etc. would suddenly become all many buyers could afford. Borrowing to buy an asset that depreciates rapidly is among the most foolish financial moves anyone can make.

  • avatar
    dwford

    New car dealers are already subject to plenty of regulation. Buy a car lately? Lot’s of forms with legalese on them. In most states, dealers are limited on how much they can mark up the finance rates, 2.5 points in CT, and though many customers don’t know it, you can negotiate that – especially if you are pre-approved at a bank first.

    The dealers are also subject to more rigorous bank oversight – especially in the last few years. The banks check the book outs on used cars, to make sure the dealers aren’t inflating the car’s value to secure more funding, and banks are requiring more proof of income and proof of residence before approving subprime customers.

    Customers who don’t read what they are signing still risk having an extended warranty thrown into the mix, which is dirty, but the customer can always cancel that stuff after the sale very easily.

    It’s not airtight, but it a lot less sleazy than it used to be.

    • 0 avatar
      NulloModo

      Exactly. The banks are pretty good at checking up to make sure they are making good loans these days. Secondary lenders routinely charge pretty high bank fees so they are guaranteed money up front, and some only lend money if they are in a positive equity situation from day 1, that is, if they have to repo the car after a (missed) payment or two, the bank still makes money on the deal.

      Also, I’m not sure if this is true in all states, but here all customers see and have to sign a truth in lending document during the paperwork process. This document clearly states the interest rate paid, the selling price of the car, and the total that will be paid over the life of the loan including all interest payments. The dealer can’t force anyone to take a car without the customer signing this document.

  • avatar
    M 1

    As usual, Obama is running a line of BS. I especially love how he chooses vague, broad terminology so that people won’t actually know what is being proposed. Sure, joke about sheyster dealers, but the fact is they’re small business, it’s a massively regulated business already, and it’s damned hard work.

    The short version is that the administration is creating two vast new regulatory entities (anybody surprised by that?). They are the Consumer Financial Protection Agency and the Bureau of Consumer Financial Protection — both focused on Wall Street. But part of the CFPA’s proposed purview is also to regulate the individual business transactions of automobile dealers (which the FTC does today), and the BCFP will regulate the finances and accounting practices of automobile dealers.

    This is about accounting and reporting rules, it has nothing to do with whether or not Joe Customer can “trust his dealer”. If you’re stupid enough to buy the undercoat, Obama will not be parking Air Force One in the back lot to leap out and rescue you. And this isn’t some kind of crafty jab at the Evil Capitalist Car Manufacturers; it changes accounting and reporting rules for small business. Period.

    And lest you think dealers are just an accidental inclusion, the bill is 99% about continuing the Democrat war against Wall Street. Yet they are fighting hard against something called the Brownback Amendment, whose sole purpose is to exclude auto dealerships from regulation by those two agencies.

    This administration has already used accounting-rule tricks to create serious chaos in the dealer marketplace. Last year the administration removed the option of using LIFO (last in / first out) accounting, a practice that had been in standard use by all types of manufacturers for about 70 years. The net result was that dealers suddenly found themselves liable for income taxes against their full inventory. Rather than being able to apply profit income against the most expensive cost (new inventory), dealers were suddenly treated as if profits were *already realized* against all inventory on hand.

    Pretty nasty, and it shut a whole bunch of companies down over just a couple months. In 2009 the big three were whacking name-brand dealerships at the same time, so a lot of that impact just got lost in the shuffle, but I remember being puzzled by the number of small independents that evaporated almost overnight. It didn’t make sense to me. It seemed that lots which were full of inventory folded too quickly — and now I think this LIFO ruling was probably the invisible hand responsible for that.

    I’m constantly stunned by the extent of the long term damage this administration has caused in such a short period of time.

  • avatar
    ihatetrees

    Sure, joke about sheyster dealers, but the fact is they’re small business, it’s a massively regulated business already, and it’s damned hard work.

    I’m no fan of this administration – but there’s a reason buying a car is borderline root canal work for many: State laws protecting dealers from any sort of OEM quality control and professional retail brand management.

    Yes, there are good, hard-working people in auto retail and dealerships. But the business model gives too many advantages to shady, unethical practices.

    If given the green light, would some OEM’s crap the bed and mismanage dealers and marketing? Sure. But not for long. If you care about your brand, you don’t let retail cancers (such as Bill Heard) sell your product.

    • 0 avatar
      M 1

      “Yes, there are good, hard-working people in auto retail and dealerships. But the business model gives too many advantages to shady, unethical practices.”

      Even if that was true — and I really don’t think that’s the case — the fact is, the proposed law simply doesn’t go there. It’s all about filing paperwork with the government and accounting practices.

      Hence my opening statement about the way PBO spun his message.

    • 0 avatar
      dwford

      It’s amazing how many shady customers there are as well. Don’t think that people who consider themselves “honest” don’t try to put one over on the dealer. Just had a customer pull out a title stamped “salvage” during delivery – no mention of it when we appraised the trade. Customers play the fictitious price quote game to score a lower price etc. It’s all a game on both sides, each trying to gain advantage. As much as people say they hate it, they play the game none the less. That’s what makes it fun! I get beat with the salvage title on one deal, the next guy gets his trade undervalued by $1500.

      As for the financing, smart customers get pre-approved at a bank so they have a good idea what their rate will be, then make the dealer beat it (which they likely can do). Do you care if the dealer made money on the financing if it is a lower rate than the bank? Who is ripping you off in that circumstance? The bank or the dealer?

  • avatar
    Gardiner Westbound

    Auto dealers want the right to rip people off on financing. Explains why few tears were shed when the Detroit Three peremptorily closed down 1,700 of the gypsies, tramps and thieves.

  • avatar
    Jimmy7

    Wow. Unless you’re buying a new car with a 0% loan, there is no reason to use the dealer’s credit department. If you can’t get a loan from a bank or credit union, you need to be looking at a cheaper car.

    And if you think Obama should have trashed the rest of the limited consumer protections in the bill to pick a fight with his own party’s local donors in an election year, your head is up your tailpipe. You think you’re going to get a better deal from the other side next year? Well, that’s why we have elections. But please, do your homework before you vote.

    • 0 avatar
      dwford

      If you buy using the 0%, you are overpaying for the car. You invariably lose the big rebate, and the dealer is not going to discount as much knowing that they can’t get any finance income. The best bet is to finance with the dealer, then either pay it off with another loan (if you find a cheaper rate) or cash.

    • 0 avatar
      NulloModo

      dwford –

      I disagree with that. My dealership will sell the car for the same price whether the customer is financing with interest, at 0%, or paying cash. The rebates change of course, but that is from the manufacturer, the actual discount from the dealer remains the same.

      Most buyers simply pay the payment, and the payment alone, through the life of the loan. So if financing at 0% leads to a lower payment than taking the rebates and accepting whatever bank rate they can get, the 0% works out in the customer’s favor.

      Now that being said, not all places work the same, and I realize that. We’re a very high volume store, and if we only make a couple hundred on a sale, it still works out in the end because we move a unit, and every unit moved leads to more allocation in the future and more chance to make a big profit given the right customer and circumstances. Also, salespeople at my store aren’t paid on anything on the back end, so there isn’t much motivation to try to move someone to dealer financing vs using a bank draft, cash, or the manufacturer’s subvented rated.

    • 0 avatar
      dwford

      Nullo,

      That’s why my store makes more than $2000 per car front to back while so many other stores don’t. Why should the F&I guy get stuck with a cash deal where he makes $0 or a subvented rate where he probably makes $150 if we can make it a bankrate deal that gets him $1500? We do what we have to do to get the sale, which is why we are up 146% YTD, but we try to actually make money on each sale. We try to make money on one end of the transaction or the other, but making it on both ends is better!

      My experience is that most of my customers are coming in still owing on their cars. In that case, if they gave up rebate to take the 0%, they probably cost themselves some money.

  • avatar
    Dr Lemming

    The tone here is tiresome. Yup, it’s all Obama’s fault that it takes the approval of the House and Senate to pass a law. It’s all Obama’s fault that financial reform is a pretty challenging issue, both because of strong Republican opposition to him succeeding at ANYTHING as well as a Democratic Party with a pretty broad ideological base. And that’s not talking about how some key Dems are from states that have powerful constituencies who could make their reelection prospects more difficult. Note to self: Auto dealers and lenders tend to be quite powerful political players.

    I don’t know why Edward is so surprised that Obama would shift positions. He’s basically a pragmatic centrist on most issues. He also has a record of pulling back on a controversial provision if he can’t get a key piece of legislation approved, e.g., he abandoned the public option when it became clear that this provision would sink healthcare reform. That angered a lot of liberals, but you know what? He actually got a bill passed. That surprised the heck out of me.

    As a consumer of news, what I would like to know is the whole picture: What was the Republican stance on this provision? Where was Democratic leadership in Congress? Who was pressing whom, and how hard?

  • avatar
    Angainor

    “Centrist?” How far to the left do you have to be to consider Obama a centrist? Geez.

  • avatar
    SherbornSean

    +1 Dr. Lemming.

    Let’s move on from the Obama bashing and get back to cars, OK?

  • avatar
    psarhjinian

    If you live in the right-wing echo chamber, John McCain looks leftist, never mind Barack Obama. The American political spectrum ranges from the Right to the Ultra-Right, and has since the Republican Party lost it’s mind during the Clinton years.

    In most of the rest of the western, democratic world, Obama is right of centre. He’s certainly to the right of Angela Merkel and David Cameron, and possibly Silvio Berlusconi and Stephen Harper. Hell, he’s right-wing compared to H. George Bush.

    • 0 avatar
      Angainor

      I’m not sure what bizarro world you are living in, but I sure would like to know on exactly what policy point or idealogy Obama is to the right of Merkel or Cameron on. If Obama is not a hard left politician then what American politician is?

    • 0 avatar
      segar925

      What kind of crack are you smoking?

    • 0 avatar
      shiney2

      psarhjinian is correct. Try substituting our health care and social safety nets for the ones found in Europe and you will see clearly that Obama is center/right in comparison.

    • 0 avatar
      Angainor

      Well shiney2, that’s just intellectually lazy.

      Not being able to get a Euro style health and social system through Congress does not equal center/right. Do you think that, if he had the power, that Obama wouldn’t implement something similar if not more “progressive”. Not having the ability to ram one’s far left programs through Congress does not make you “center/right”. If he could, he would.

      And btw, how are those programs working out for the Europeans now? Let’s see, Greece is bankrupt, England is talking about the cuts they are going to have to make, France is striking and rioting because the government just proposed raising the retirement age to 62, and Merkel is telling Obama he needs to stop spending and start cutting. Yet that’s the direction Obama wants to take us.

    • 0 avatar
      shiney2

      Picking and choosing the European country you want to compare us to is intellectually lazy. I agree that picking out what is left or right is difficult – I tend to define conservative as “pragmatic” and always thought of myself as one, but since radical right wingnuts have successfully hijacked the word, current use definitions of political terms no longer line up with historical usage.

      Greece has long been a corrupt mess where the wealthy don’t pay their taxes, and being tied to the Euro has been a disaster for their tourism based economy. Merkel may have scolded the US, but Germany has far more liberal domestic policies than the US, and she has been involved in manipulating the economy and markets at least as much as Obama. France and England have problems unique to themselves. Perhaps if you looked at the Netherlands you would feel better about Europe :)

      I’m not a huge fan of Obama, but the idea that he is some sort of crazy left winger is nonsense (or intellectually lazy if you prefer), and he is considerably closer to center than the current ideology obsessed GOP. Anytime you start thinking it would be okay to let the government and the economy collapse so you can have you way, you have ceased to be anywhere near the pragmatic center.

  • avatar
    shaker

    Given the choice between “crack” and “Fox News”, well – I’ll have a beer.

  • avatar
    segar925

    Keep drinking the liberal “Kool Aid” while our country goes down the drain. Fox News is fair & balanced, that’s why they’re #1 in cable news and everybody on the left hates them.

  • avatar
    M 1

    For the record, dealers got an 11th hour reprieve. The bill will not affect them. The rest of the country is still screwed, though.

  • avatar
    Bridge2farr

    “Auto dealers want the right to rip people off on financing. Explains why few tears were shed when the Detroit Three peremptorily closed down 1,700 of the gypsies, tramps and thieves.”

    A carefully crafted and researched proclamation. LOL


Back to TopLeave a Reply

You must be logged in to post a comment.

Subscribe without commenting

Recent Comments

New Car Research

Get a Free Dealer Quote

Staff

  • Authors

  • Brendan McAleer, Canada
  • Marcelo De Vasconcellos, Brazil
  • Matthias Gasnier, Australia
  • Tycho de Feyter, China
  • W. Christian 'Mental' Ward, Abu Dhabi
  • Mark Stevenson, Canada
  • Faisal Ali Khan, India