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Monday, June 21, 2010

Financial Reform and Car Dealers

As you know, there is a concerted effort in progress by the Obama administration and Congress to present a bill to our President to sign into law which would protect us from another collapse of our financial system. This bill is aimed mainly at banks, but also includes other companies that loan money or are involved in that process.

Many feel that car dealers should be included as part of the Financial Reform Bill. Currently the Senate bill includes car dealers but the House bill does not. There has been a monstrous effort on the part of car dealers and their lobbyists like NADA and the National Automobile Dealers Association to exempt car dealers from financial reform. Currently the House Ethics Committee is investigating eight House representatives who took large sums of money from car dealers just before they voted on the bill for financial reform. There is not a day that goes by that I don’t get an email or a fax from NADA or FADA (Florida Automobile Dealers Association) imploring me to give money to their political action committees or call my Senator to exempt car dealers from financial reform.

One might ask why a car dealer should be excluded. After all, a car is the second largest purchase that most of us make next to our homes and we almost always borrow money to finance this purchase. Car dealers argue that most of them don’t “really” loan money to customers who buy their cars because in most cases they sell the finance contract that the buyer signs to a bank or other lending institution. This is technically true, but is totally misleading and not at all a good reason to be excluded from the Financial Reform Bill.

Even though most car dealers don’t hold the loan for the cars they sell, they do everything else that a bank does in making a loan. The car dealer largely determines the credit worthiness of the borrower. He also largely determines the interest rate charged, the down payment, the length of the loan, and the collateral for the loan. The bank that the dealer sells the finance contract to certainly has a voice in all of this, but it relies largely on the dealer. The bank never sees or even speaks with their borrower. The car dealer interviews the customer for credit information, runs the credit bureau reports, and fills out the finance contract that the customer signs.

One of the biggest causes for the collapse of our financial system was from bad and fraudulent loans made in the housing market. Mortgage brokers, home buyers, and some banks knowingly falsified credit applications and made loans to people who obviously would not repair their loans. This same thing happened and is continuing to happen with car loans. The car dealer is often to blame when a credit application is falsified, a down payment is exaggerated, or the true value of the car is falsely enhanced.

Many car dealers make more money from financing the car then they do from the markup on the car. Dealer financing profits range between an average of $500 and $2,000 for every car sold. Financing a car also affords the car dealer the opportunity to include a large menu of “products” in the amount financed, which the dealer is immediately paid for. Some examples are GAP insurance, extended warranties, theft insurance, prepaid car maintenance, and road hazard insurance. They also receive a large kick-back from the bank they sell the finance contract to. The dealer “buys” a low interest rate from the bank, like 2.5% and marks it up to the customer to say 5.5%. There are limits on the amount of markup based on the customer’s credit worthiness, the banks rules, and state law. But a dealer can, within these limits, make many thousands of dollars in interest kick-back on a single transaction.

For those of you who are regular listeners to my radio show every Saturday morning, 9-10 on Seaview Radio 95.9 FM or 960 AM, you may have heard a recent caller named Norma. I’m trying to help her 79 year old brother, Herman, for whom Norma is the primary caretaker. Earlier this month, without Norma’ knowlege, Herman bought a 2008 used Kia SUV on credit from Delray Kia for a total sale price of $23,599.26. His monthly payments are for $312.11 for the next 66 months, 5 ½ years, and the interest rate is 14.99%. Herman’s only source of income is social security and he resorts to food stamps and “meals on wheels” to eat. Furthermore he is physically and mentally disabled with steel rods in both legs from a terrible auto accident. Herman does not have a copy of the credit application which he should have filled out and signed and has no recollection of receiving or signing one. Herman also had GAP insurance and Etch insurance “included” in his finance contract for a total of $898.

This sort of thing happens thousands of time every day and it may even be perfectly legal under today’s laws. What prompted having car dealers added to the Financial Reform legislation in the first place was a letter written to the chairman of the Senate Banking Committee, Chris Dodd, by the Secretary of the Army, John M. McHugh. He said that soldiers need to be protected from “unprincipled auto lending” so they can concentrate on their primary mission: “protecting our great nation”. Soldiers who are distracted by financial issues at home are not fully focused on fighting the enemy, thereby decreasing mission readiness”.

If we should protect our soldiers from “unprincipled auto lending” why not also protect our civilians, especially the elderly, poor, and disabled like Herman?

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