Robert Mims of Greenfield, Wis., says he works two jobs to make the car payments on a 2005 Ford Taurus he bought four years ago for about $13,000. The payments — about $17,000 so far — already amount to more than what the car is worth, but he's nowhere near paying off his car loan.
Mims, who has a bankruptcy on his credit record, says he left the dealership under the impression that the lender would lower his 24.9 percent interest rate if he made his payments on time for six months.
He says he kept his end of the bargain, but the dealer did not. Four years later, he still hasn't been able to negotiate a lower rate despite making his payments on time, and most of the payments he's made continue to go toward interest, he said.
"All they're trying to do is rip off the American buyer," he said. "At this moment, there's probably someone getting suckered into a financing deal they can't afford."
Consumer advocates say Mims' case exemplifies the need for stronger consumer protection regarding loans offered by auto dealers. The White House and many Senate Democrats agree; they're pushing for a new consumer financial protection agency that would regulate not just car dealers but other businesses that lend money to consumers.
The fight is taking place as senators debate a larger financial regulation bill meant to curb some of the excesses they say contributed to the country's recent financial meltdown. The Senate bill is aimed at all businesses that extend financing to their customers, from mortgage companies to banks to credit card companies.
Car dealers and other groups are fighting aspects of the proposed regulations, arguing that they already adhere to strict regulations on the state and federal level, and the additional regulation would increase their cost of doing business. They say the real aim of new financial regulation should be the big banks and financial houses.
"The key to reforming Wall Street has nothing to do with the local auto dealer," said Ed Tonkin, an Oregon dealer and chairman of the National Automobile Dealers Association. "It's using a sledgehammer to kill a gnat."
The battle over how car dealers — and even those who sell boats, motorcycles and RVs — should be treated under a proposed consumer financial protection agency is just one piece of the lobbying that's taking place on the legislation.
A similar bill passed by the House exempted dealers from new regulation, and Sen. Sam Brownback, a Kansas Republican, is sponsoring an amendment that also would do so in the Senate legislation.
Auto lending is a $350 billion a year industry — second only to home mortgages, according to a recent Cambridge Winter report. The dealers argue they typically act only as "intermediaries" on their customers' financing deals and, therefore, shouldn't be subject to any additional regulation.
"The auto dealer is the conduit between the customer and the financing institution," said Russ Darrow Jr., CEO of the Russ Darrow Group, a Milwaukee-area auto dealer.
But consumer advocates say dealers usually act as loan brokers for their customers and are often the only point of contact consumers have on these loans. They add that dealers normally write up the loans themselves and then sell them to a third-party lender. And car loans can be so lucrative to the dealer that they often make more money on the financing than on the actual cars they sell, consumer groups say.
"They shouldn't be out from under because it's at the point of sale that the mischief occurs," said Kathleen Day, of the Center for Responsible Lending.
Consumer advocates say dealers may steer customers into higher-interest rate loans, pad the loans with fees for things like rust-proofing and extended service contracts. They may also shop for loans that don't necessarily result in the best interest rates for their customers, but instead get the best "dealer participation" rate — essentially a cut of the interest payments.
"We call them kickbacks," said Rosemary Shahan, president of the Consumers for Auto Reliability and Safety, who adds that these types of tactics have contributed to people losing their cars or, like Mims, getting so far in debt that they owe more on their cars than they are worth.
Extra "dealer participation" charges — the amount paid beyond the best rate a buyer would have qualified for — translated into $323.5 million in interest overpayments in Wisconsin alone in 2007, according to an analysis of banking and car data by the Center for Responsible Lending.
Last year, 72 people filed complaints involving auto financing with the Wisconsin Department of Financial Institutions, according to Paul Egide, the agency's director of consumer affairs. Complaints centered on such things as misrepresentation of credit terms, excessive charges, abusive collection practices and illegal repossession of cars, he said.
Vince Megna, a Milwaukee attorney who represents consumers whose cars turn out to be lemons, says many of his clients also complain about unnecessary charges tacked on to their loans and about being forced to binding arbitration on their loans if a discrepancy arises.
"There's a lot of paperwork when you buy a car," he said. "Most people don't read all of it. You just keep signing."
Most oversight of auto loans is done at the state level. The Federal Reserve does not require dealers to adhere to the same type of disclosure rules required of mortgage lenders and typically doesn't enforce auto loan problems.
Critics of additional financial regulation say dealers and other businesses are already heavily regulated and that the new rules could restrict the flow of credit at a time when the economy is struggling to rebound.
"It's going to make credit more expensive all around," said U.S. Rep. Paul Ryan, R-Wis.
In addition to the car dealers, other organizations from the Chamber of Commerce to the National Marine Manufacturers Association to the American Dental Association are sounding the alarm on the proposed consumer financial protection agency. Many industry representatives, including officials at Harley-Davidson Inc., Mars and eBay Inc. are asking for exemptions under the legislation.
"Where does it stop?" Day said. "A loan is a loan is a loan."
Consumer groups are not the only ones fighting against exemptions for certain industry sectors. Bankers and major financial institutions say the rules should apply evenly to any entity offering financial services. Bank representatives note that the "shadow banking industry" now corners about 70 percent of the total credit market in the U.S. economy, according to the American Bankers Association.
"The bottom line is we do believe there are major gaps and loopholes when it comes to the nonbanking industry as far as regulations and examination," said Kurt Bauer, of the Wisconsin Bankers Association.
And many of the problems that surfaced in the financial crisis were the result of actions taken by less regulated non-banking institutions, argued Daryll Lund, president of the Community Bankers of Wisconsin.
Diana Farrell, deputy director of the White House National Economic Council, said last week that loans made by auto dealers should not be exempt from regulation under the new agency.
"Why should a bank be treated differently than an auto dealer in providing you money?" she asked. "If they're offering good, transparent, fair financing products to their customers, they have nothing to worry about."
The fight is also pitting the car dealers against the Pentagon itself. Military officials say auto dealers defraud soldiers by bundling hidden fees into auto loans and luring them to dealerships with false promises. The Military Coalition, made up of 31 advocacy groups representing 5.5 million soldiers and their families, says attempts to exempt car dealers would "allow unscrupulous dealers to continue to take advantage of service members and their families."
The issue is likely to come to a head as the Senate debates the legislation over the next several days. On Thursday, the Senate defeated an attempt to weaken the bill's consumer-protection powers, but more challenges to the bill are expected.
In the meantime, consumer advocates say people are falling victim to predatory lending practices at car dealerships across the country. Joyce Smith, 63, says it happened to her when she accompanied a friend to a car dealership two years ago.
When Smith decided to buy a car, she says she didn't realize her credit was being used to also buy a car for her friend, who had bad credit.
"At the time, I wouldn't even buy a car or co-sign for one of my kids," she said. "Why would they play on somebody when they know this person did not agree to buy a car for somebody else?"
Smith sued the auto dealer for fraud, misrepresentation and violation of state consumer protection laws. She settled out of court.
Her attorney DeVonna Joy, of the Consumer Justice Law Center, says Smith's case is not an isolated one.
"There are shady dealer practices everywhere," she said. "Wisconsin is no exception."
Smith says she will never sign another contract without bringing someone else to help her read the paperwork.
As for Mims, he says: "I'm not going to buy another new car until I have a bunch of money saved up."
Source: McClatchy-Tribune Information Services.