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Sometime next week, President Obama will finally sign a financial reform bill. Plenty of banks will have to deal with messy new rules, but one big winner in the “spare me from further regulation” sweepstakes was auto dealers.
Mr. Obama wanted the new consumer financial protection agency to oversee dealers and the loans they arrange for consumers. So did many consumer groups and military organizations, because crooked dealers have taken advantage of many young soldiers.
But the dealers prevailed, winning exemption from oversight by the new agency, in part through the efforts of Senator Sam Brownback, Republican of Kansas. Mr. Brownback (Once again reality trumps fiction. Slamovitz, now Brownback. Maybe Dickens great character names weren't made up.) said in a May statement on his Web site that “auto dealers are a part of Main Street, not Wall Street.” That makes sense as long as you ignore that Wall Street firms bundle into bonds many of the loans that dealers help originate and conveniently forget that lots of dealers are actually owned by publicly traded companies.
Mr. Brownback also noted that “more than 90 percent of auto loans are financed not through the dealer, but through an outside financial institution.” In fact, people apply for their car loans at an auto dealer about 80 percent of the time, according to J. D. Power & Associates.
Still, Mr. Brownback and the dealers won out, and now that they have, it’s worth examining some of the practices that had consumer groups so exercised. Think of this as a guide to the issues that the new agency may have tackled if it had only been able to.
THE YO-YO PROBLEM The yo-yo phenomenon is rare, but truly insidious and will probably escape oversight by the new agency because auto dealers, not banks, perpetrate it.
Here’s how it often occurs. Consumers sign contracts agreeing to an interest rate and price and drive away from a dealership thinking a deal is done. Not long after, they get a call asking them to come back to the dealership. Once dealers reel them back in (hence yo-yo), they say the financing has fallen through and try to get consumers to sign new contracts with higher interest rates.
This happened to KeyAnn Gladden at a Hall Automotive dealership in Virginia Beach, Va., two years ago. When she refused to sign new paperwork or return her car, citing her original contract and the fact that the sales staff had told her she was approved for financing, she said the dealership tried to have her arrested at her job at a day spa.
“This is a nightmare,” said Ms. Gladden, who is now 30 years old. She added that she lost her job in part because of the police visit and is suing the dealership. “It’s about my credit history and the credibility of my character.” A representative of Hall Automotive refused to comment on Ms. Gladden’s allegations.
Why does this sort of thing happen? “Many times it has to do with errors on the consumer’s application for credit, whether intentional or an accident,” said Bailey Wood, a spokesman for the National Automobile Dealers Association.
Consumer advocates and plaintiff’s lawyers, however, point to a different problem. Often, a dealer will quote an interest rate from a bank or finance company to a consumer, and the buyer signs a contract. Only then does the dealer get official approval from the lender who provided the rate quote. Every so often, lenders change their mind (or dealers do, lawyers say, because they may be able to make more money by arranging a higher-interest loan elsewhere and shoving it down the throat of a frightened buyer who needs the car to get to work).
The best way to avoid this is to get your loan from a bank or credit union in the first place, but that might mean missing out on zero percent financing at the dealer if your credit is good enough to qualify.
So pick your dealer carefully. “It’s important to note that not all dealers are shysters,” said David Julian, the director of the Defense Department’s office of personal finance who added that many dealers near military bases sign a code of ethics.
You can also try to put a dealer on notice that it’s probably best to pick on someone else. Demand to know who has agreed to provide the loan, for instance, and ask to know if the financing is, in fact, truly approved. Or make a point of refusing to sign a sales contract that says that the sale is conditioned upon financing approval, a consumer tactic that the dealers association endorses.
THE MARKUP PROBLEM One thing consumers may not realize when applying for an auto loan through many dealers is that it’s often the dealers, not the company providing the loan, that ultimately decide how much you’ll pay. A bank quotes a wholesale rate to the dealer, and then the dealer is free to mark it up by as much as 3 percentage points. The dealer’s ultimate profit on any deal depends in part on how much it marks up this rate.
That spread used to be higher, before a number of lawsuits using data from as recently as 2004 revealed that blacks and Hispanics were paying more for their loans, even when they had the same credit scores as whites. And in case you didn’t believe that everyone’s a little bit racist sometimes, lawyers in one lawsuit determined that minority-owned dealers had the biggest markups, according to Stuart Rossman of the National Consumer Law Center in Boston, who was co-counsel on the cases.
It’s not clear what the numbers are today, but remember that on many parts of the Internet, no one knows you’re black. So get preapproved for an auto loan via a bank’s or credit union’s online application process before going to a dealer to discuss financing. Then, no matter what your skin color, ask the dealer to beat that rate.
THE ADD-ON PROBLEM If you’ve gotten a good price on the car and arrived with cash or a loan from someplace else, dealers will try to find some other way to make money off you. In fact, lawyers for the finance companies that supply dealer loans promised Mr. Rossman as much when he was in the middle of suing them. “I would see them at legal conferences, and they would tell me that if we stopped them from doing what they were doing, they would just move their profit margins someplace else,” he said.
And so the dealers try to sell you window etchings and service contracts, or disability and other insurance. Or, they try to force you to buy these things by implying that the add-ons are a condition of getting a loan or getting a good rate on one.
Mr. Bailey of the dealers association says that this is illegal, but some dealers do it anyway. The Oregon Justice Department has taken action twice in the last two years against dealers like this. In August 2008, it reached a $100,000 settlement agreement with Salem Nissan in Salem, Ore., after finding that the dealership had added all sorts of products to almost all its contracts without the buyers knowing they didn’t have to buy them. As is standard in these sorts of agreements, the dealership admitted no violation of the law.
Most of these products are of questionable value or available in better, cheaper versions elsewhere. Keep a careful eye on your paperwork to see if they’ve ended up on your bill.
Feeling dirty yet? I do. Many dealers have now successfully stood up in public and persuaded legislators to shoo away new regulators in an area that needs better oversight. That, for better or for worse, will make all dealers suspect in the eyes of many consumers.
http://www.nytimes.com/2010/07/17/yo...l?ref=business
Mr. Obama wanted the new consumer financial protection agency to oversee dealers and the loans they arrange for consumers. So did many consumer groups and military organizations, because crooked dealers have taken advantage of many young soldiers.
But the dealers prevailed, winning exemption from oversight by the new agency, in part through the efforts of Senator Sam Brownback, Republican of Kansas. Mr. Brownback (Once again reality trumps fiction. Slamovitz, now Brownback. Maybe Dickens great character names weren't made up.) said in a May statement on his Web site that “auto dealers are a part of Main Street, not Wall Street.” That makes sense as long as you ignore that Wall Street firms bundle into bonds many of the loans that dealers help originate and conveniently forget that lots of dealers are actually owned by publicly traded companies.
Mr. Brownback also noted that “more than 90 percent of auto loans are financed not through the dealer, but through an outside financial institution.” In fact, people apply for their car loans at an auto dealer about 80 percent of the time, according to J. D. Power & Associates.
Still, Mr. Brownback and the dealers won out, and now that they have, it’s worth examining some of the practices that had consumer groups so exercised. Think of this as a guide to the issues that the new agency may have tackled if it had only been able to.
THE YO-YO PROBLEM The yo-yo phenomenon is rare, but truly insidious and will probably escape oversight by the new agency because auto dealers, not banks, perpetrate it.
Here’s how it often occurs. Consumers sign contracts agreeing to an interest rate and price and drive away from a dealership thinking a deal is done. Not long after, they get a call asking them to come back to the dealership. Once dealers reel them back in (hence yo-yo), they say the financing has fallen through and try to get consumers to sign new contracts with higher interest rates.
This happened to KeyAnn Gladden at a Hall Automotive dealership in Virginia Beach, Va., two years ago. When she refused to sign new paperwork or return her car, citing her original contract and the fact that the sales staff had told her she was approved for financing, she said the dealership tried to have her arrested at her job at a day spa.
“This is a nightmare,” said Ms. Gladden, who is now 30 years old. She added that she lost her job in part because of the police visit and is suing the dealership. “It’s about my credit history and the credibility of my character.” A representative of Hall Automotive refused to comment on Ms. Gladden’s allegations.
Why does this sort of thing happen? “Many times it has to do with errors on the consumer’s application for credit, whether intentional or an accident,” said Bailey Wood, a spokesman for the National Automobile Dealers Association.
Consumer advocates and plaintiff’s lawyers, however, point to a different problem. Often, a dealer will quote an interest rate from a bank or finance company to a consumer, and the buyer signs a contract. Only then does the dealer get official approval from the lender who provided the rate quote. Every so often, lenders change their mind (or dealers do, lawyers say, because they may be able to make more money by arranging a higher-interest loan elsewhere and shoving it down the throat of a frightened buyer who needs the car to get to work).
The best way to avoid this is to get your loan from a bank or credit union in the first place, but that might mean missing out on zero percent financing at the dealer if your credit is good enough to qualify.
So pick your dealer carefully. “It’s important to note that not all dealers are shysters,” said David Julian, the director of the Defense Department’s office of personal finance who added that many dealers near military bases sign a code of ethics.
You can also try to put a dealer on notice that it’s probably best to pick on someone else. Demand to know who has agreed to provide the loan, for instance, and ask to know if the financing is, in fact, truly approved. Or make a point of refusing to sign a sales contract that says that the sale is conditioned upon financing approval, a consumer tactic that the dealers association endorses.
THE MARKUP PROBLEM One thing consumers may not realize when applying for an auto loan through many dealers is that it’s often the dealers, not the company providing the loan, that ultimately decide how much you’ll pay. A bank quotes a wholesale rate to the dealer, and then the dealer is free to mark it up by as much as 3 percentage points. The dealer’s ultimate profit on any deal depends in part on how much it marks up this rate.
That spread used to be higher, before a number of lawsuits using data from as recently as 2004 revealed that blacks and Hispanics were paying more for their loans, even when they had the same credit scores as whites. And in case you didn’t believe that everyone’s a little bit racist sometimes, lawyers in one lawsuit determined that minority-owned dealers had the biggest markups, according to Stuart Rossman of the National Consumer Law Center in Boston, who was co-counsel on the cases.
It’s not clear what the numbers are today, but remember that on many parts of the Internet, no one knows you’re black. So get preapproved for an auto loan via a bank’s or credit union’s online application process before going to a dealer to discuss financing. Then, no matter what your skin color, ask the dealer to beat that rate.
THE ADD-ON PROBLEM If you’ve gotten a good price on the car and arrived with cash or a loan from someplace else, dealers will try to find some other way to make money off you. In fact, lawyers for the finance companies that supply dealer loans promised Mr. Rossman as much when he was in the middle of suing them. “I would see them at legal conferences, and they would tell me that if we stopped them from doing what they were doing, they would just move their profit margins someplace else,” he said.
And so the dealers try to sell you window etchings and service contracts, or disability and other insurance. Or, they try to force you to buy these things by implying that the add-ons are a condition of getting a loan or getting a good rate on one.
Mr. Bailey of the dealers association says that this is illegal, but some dealers do it anyway. The Oregon Justice Department has taken action twice in the last two years against dealers like this. In August 2008, it reached a $100,000 settlement agreement with Salem Nissan in Salem, Ore., after finding that the dealership had added all sorts of products to almost all its contracts without the buyers knowing they didn’t have to buy them. As is standard in these sorts of agreements, the dealership admitted no violation of the law.
Most of these products are of questionable value or available in better, cheaper versions elsewhere. Keep a careful eye on your paperwork to see if they’ve ended up on your bill.
Feeling dirty yet? I do. Many dealers have now successfully stood up in public and persuaded legislators to shoo away new regulators in an area that needs better oversight. That, for better or for worse, will make all dealers suspect in the eyes of many consumers.
http://www.nytimes.com/2010/07/17/yo...l?ref=business
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