A Green Light for Car Dealers to Rip Off Buyers?

The collapse of the American auto industry has shut down thousands of car dealers across the U.S. and left many others struggling to survive. Now some that remain are trying to transform their woes into a political advantage.

Lobbyists for car dealers have won a potentially valuable exemption from major consumer protection legislation recently approved by the House of Representatives and heading for the Senate. The bill would create a new federal agency to shield individuals from ambiguous and misleading financial deals offered by home lenders, credit-card companies, and other businesses. Notably left off the list are auto dealers. That's no small loophole. Consumers hold $850 billion in car debt; dealers helped market 80% of that amount, and most collected fees for their services.

Holding salesmen to tougher standards would risk putting more of them out of business, the industry's trade group, the National Automobile Dealers Assn., has warned lawmakers. "In light of the current credit crisis and the lowest auto sales in a generation, a dramatic restructuring of auto finance would increase consumer costs, depress auto sales, and lessen competition," the association's spokesman, David F. Hyatt, says in a written statement to Bloomberg BusinessWeek. He adds that "effective federal and state laws governing dealer-assisted financing already exist."

Representative John Campbell (R-Calif.), who ran a Saab dealership before joining Congress in 2005, has helped engineer the protection of the industry. "The point here is that auto dealers are not financial entities, so why should they be regulated like one?" he says.

Dealers argue that they shouldn't fall under the jurisdiction of the new Consumer Financial Protection Agency because they generally don't provide the money for loans. Instead, car retailers act as middlemen, connecting buyers with lenders. Banks and finance companies that fund auto loans would be covered by the agency.

Consumer advocates counter that dealers play a critical role in pushing car loans—one similar to the function of mortgage brokers in the real estate market. Mortgage brokers would be covered under the version of the regulatory reform legislation that the House approved on Dec. 11. The bill's chief sponsor, Financial Services Committee Chairman Barney Frank (D-Mass.), unsuccessfully opposed the auto dealer exemption.

Car salesmen can direct customers to lenders offering higher interest rates than might be available elsewhere and sometimes encourage loans that are unnecessarily large, the Cambridge Winter Center for Financial Institutions Policy, a liberal think tank in New York, said in a report last month. "Far from being passive administrators with respect to auto finance, auto dealers actively market and price borrowers' loans," the center asserted.

Exempting auto dealers would be particularly inappropriate now because car salesmen are being hit with fresh complaints that they are preying on financially unsophisticated members of the military services, consumer activists say. In November, Michael S. Archer, a civilian regional legal assistance officer with the Marine Corps at Camp Lejeune, N.C., wrote a five-page memo outlining a series of instances in which he says local dealers took advantage of men and women in uniform.

The memo, which Archer sent to a number of consumer groups, mentioned situations where North Carolina dealers allegedly falsified customers' credit information, concealed high interest rates, or pressured troops into purchasing expensive cars with large loans that they couldn't afford on military pay. Archer concluded: "The majority of service members who have been ripped off in motor vehicle sales will probably never see a military legal assistance attorney....Some may not even know they have been ripped off."

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