As the Senate banking committee prepares to consider financial protection reform legislation, Public Citizen and Consumers for Auto Reliability and Safety (CARS) call on Congress to protect the military from predatory auto dealer financing — an enormous problem for troops and civilian consumers alike.
Sen. Christopher Dodd’s (D-Conn.) Wall Street reform measure only partly closes the auto dealer loophole opened by the version that the House of Representatives passed Dec. 12, 2009. The groups urge lawmakers to close the loophole. In the current draft of the Senate bill, the proposed Consumer Financial Protection Bureau (CFPB) would have authority to write rules on non-bank lending, including payday loans and loans originated by auto dealers, but would have limited authority to enforce the rules.
“Rules have little value if they are not enforced,” said Robert Weissman, president of Public Citizen. “The bill should be strengthened to ensure that the CFPB has full enforcement authority. The financial industry has run roughshod over consumers and investors for too long. This is the time to stop it.”
Auto sales and service complaints perennially top the list of consumer complaints to state and local consumer protection agencies. For years, complaints about new and used auto dealers — who originate approximately 79 percent of all auto loans — have topped the Better Business Bureaus tally of consumer complaints.
Members of the Armed Forces face particular trouble from auto dealers. Numerous studies have documented that dealers target troops and engage in predatory auto lending practices, such as loan packing (the deceptive sales of overpriced add-ons with little or no real value) and yo-yo financing (bait-and-switch schemes usually involving threats and intimidation, such as threats to report vehicles as stolen or to repossess them, potentially affecting the service members security clearance and career).
Dealers typically gain access to the service members’ pay and siphon off funds directly. This means that even if the service members cannot afford food for their families, the dealers still get paid directly from the federal government. In an economy where other would-be car buyers face possible job loss, military members are an extremely reliable source of funds, making them prime targets for unscrupulous dealers.
The Department of Defense (DOD) recently conducted an informal survey of personal financial counselors and legal assistance officers who counsel the military on finances, and found that 72 percent of the 659 who responded said they had counseled service members during the past six months regarding one or more predatory auto lending practices.
“We hope that Congress has the courage to stand up to the formidable auto dealer lobby, to protect our troops and their families from unscrupulous auto financing practices,” said Rosemary Shahan, president of Consumers for Auto Reliability and Safety.
Last month, the DOD wrote a letter to the Department of Treasury seeking protection for members of the Armed Forces from unscrupulous auto sales and financing scams. “The Department of Defense would welcome and encourage [Consumer Financial Protection Agency] protections provided to service members and their families with regard to unscrupulous automobile sales and financing practices,” the letter said.
“Auto dealers are notorious for targeting military personnel, who have steady paychecks, even in an economic downturn,” said Catherine Lutz, author of Carjacked and a research professor at Brown University.
While members of the Armed Forces are serving on active duty, they do not have the time to pursue legal cases against auto dealers, particularly while the service members are deployed to duty stations around the globe and while they are serving in war zones.
While auto dealers have claimed that they are already regulated by the Federal Trade Commission and the Federal Reserve, both agencies have a history of inaction on auto issues and have failed to protect car buyers, including military personnel.
Marine Cpl. William Woods, who served two tours of duty in Iraq, described his ordeal over an auto transaction. He traded in a Mazda 3 that he owned free and clear to purchase a used Porsche, only to learn that the Porsche had been damaged in a wreck. When he returned the car for a refund, the dealer kept it — and refused to give him back his Mazda. Woods has sued the dealership. Meanwhile, he has been without a car since last August while trying to find a job. In February, CARS provided him with $3,000 so he could purchase a used car.
“The Senate’s proposed Consumer Financial Protection Bureau must live true to its name and protect consumers — particularly members of the military — from auto dealers fraudulent financing,” Shahan said.
The rate at which people are taking loans since the turn of the millennium has tripled perhaps due to the ease of application with banks embracing information technology such as the internet and mobile phones. However, the most important cause must be the boom of real estate practices.