New Consumer Protection Bill Protects Military, Riles NADA

For decades now, auto dealers have been down in the trenches, lobbying state and federal officials against any proposed legislation that they think might impact their bottom line. But in a battle brewing on Capitol Hill this week, dealers are facing a more formidable opponent: The U.S. Department of Defense.

The issue at hand is a proposed Bureau of Consumer Financial Protection, part of the larger financial reform bill presently being debated by the Senate. Sponsored primarily by Democratic Sen. Chris Dodd, Connecticut, the legislation would offer consumers protections from unethical lending and selling practices by auto dealers, among other things. Where the Pentagon comes into the debate is that some military groups have raised accusations of widespread predatory lending and other unseemly practices among auto dealers when selling vehicles to military personnel.

In a letter supporting the creation of the new bureau, Clifford L. Stanley, the Defense Department’s undersecretary for personnel and readiness, said that it could actually bolster the “mission readiness” of troops by protecting them from these practices. “Any legislation that would enable and empower our military would be welcome,” wrote Stanley.

But Republican Sen. Sam Brownback, Kansas, is sponsoring an amendment that would exempt car dealers from these provisions. The National Auto Dealers Association (NADA), which represents about 17,000 car dealers nationwide, supports this amendment.

The pair may be engaged in an uphill battle, however, as soldiers engaged in the ongoing wars in Iraq and Afghanistan engender considerable positive public sentiment. The Military Coalition, a collection of 31 advocacy groups representing 5.5 million active-duty soldiers, veterans and their families, have told Congress that Brownback’s amendment would allow “unscrupulous dealers to continue to take advantage of service members and their families.”

“After buying a home, buying a car is the biggest purchase most of us make. And a lot of military families rent, instead of buying a house, so the car purchase is actually the biggest expense for many of them,” said Katie Savant, spokesperson for the National Military Family Association. “So we want to make sure our troops are protected from unethical practices.”

Treasury Secretary Tim Geithner has also supported the creation of the new Bureau and the DOD’s position.

Susan Weinstock, financial reform campaign director for the Consumer Federation of America, a nationwide consumer advocacy organization, says the new Bureau is needed, and that car dealers should absolutely be included in its provisions.

“We’ve heard many reports from the various military-aid groups about auto dealers targeting military personnel, especially younger soldiers and marines who are just 18 or 19 years old,” said Weinstock. “These young people are ripe for the picking, because they don’t have their parents with them to guide them, and they’ve been subjected to all kinds of unscrupulous practices, like ‘yo-yo financing.’”

This ploy unfolds when someone buys a car, gets it financed, signs the paperwork, and thinks they’ve completed the purchase, said Weinstock. But then the dealer calls and says that the financing fell through and the car must be returned. When the buyer does return the car, they find that the dealer has already sold their trade-in vehicle, and a new loan is offered with a high interest rate.

Weinstock says some dealers will even “pick up the soldier at the base, drive him three hours to their dealership, and then refuse to drive him back, saying the only way he can get back is by buying a car, knowing that if he doesn’t get back in time, he’ll be classified as AWOL.”

The NADA issued a statement that reads, in part, “the broad authority granted to the Bureau of Consumer Financial Protection seriously threatens to limit dealer-assisted financing and the convenience and competition this financing offers consumers and service members at all economic levels. Since 94 percent of vehicle sales involve financing, it is essential to preserve dealer-assisted financing and affordable credit for consumers and the military. Optional dealer-assisted financing is often the most affordable financing available to service members.”

Raymond Ciccolo, president of Village Automotive Group, which includes seven different Boston-area dealerships (including Nissan, Honda, Cadillac and Volvo) is opposed to car dealers being regulated by the proposed Bureau. Ciccolo said that auto dealers are already well regulated by other agencies and laws, like the Federal Trade Commission, the Truth in Lending Act, and the Fair Credit Reporting Act.

“This is an egregious overreach by the government,” said Ciccolo, who said he served in the Marine Corps Reserves many years ago. “Most new car dealers are middlemen when it comes to the financing part. We act as a broker and place these loans through banks and finance companies. If we’re included in this new agency, we’re just going to have to hire another person, or more than one person, because it’s not clear yet what the new regulations will entail. And that’s going to cost us money.”

While the FTC technically has the authority to regulate auto dealers, said Weinstock, there’s little enforcement when it comes to the selling and financing of cars. “It has only brought one or two cases against dealers over the last 10 or 20 years,” she said, “and it hasn’t brought an auto financing case since 2000.”

Auto dealers generate more complaints to state and local consumer advocacy groups than any other line of business, according to Weinstock. 

When told of these accusations, car dealer Ciccolo said that new car dealerships could never get away with such practices. “Our investments are in the millions, and the car manufacturers control us like you wouldn’t believe,” he said. “The carmakers know that one of the most effective ways to gain market share is to provide excellent customer service. If one of us pulled something like what you described, we’d lose our franchise.”