Auto deal­ers, lo­cal banks duck new over­sight bill

Com­mu­nity busi­nesses granted ex­emp­tions to con­sumer rules, thanks in part to lob­by­ing clout

Austin American-Statesman - - BUSINESS - By Stephen Man­ning and Marcy Gor­don

WASHINGTON — The fi­nan­cial over­haul bill await­ing fi­nal ac­tion in the Se­nate in­cludes a new reg­u­la­tor whose aim is to make sure mort­gages, credit cards and other prod­ucts from big banks don’t abuse or con­fuse you.

But if you want your auto dealer to ar­range a car loan or your com­mu­nity bank to ex­tend you a credit line, be sure to read the fine print.

Thanks to their lob­by­ing ef­forts in Washington, auto deal­ers and com­mu­nity banks man­aged to keep them­selves out­side the reach of the new Con­sumer Fi­nan­cial Pro­tec­tion Bureau.

Con­sumer ad­vo­cates say bor­row­ers will re­main vul­ner­a­ble to the kind of un­scrupu­lous sell­ing of fi­nan­cial ser­vices prod­ucts that helped pre­cip­i­tate the fi­nan­cial cri­sis.

“You’re go­ing to end up with reg­u­la­tory gaps that can hurt con­sumers,” said Travis Plun­kett, leg­isla­tive di­rec­tor of the Con­sumer Fed­er­a­tion of Amer­ica.

The in­flu­ence of auto deal­ers and com­mu­nity banks comes from the strength of their small-town roots. They are peo­ple who serve as Ro­tary Club of­fi­cers and spon­sors of Lit­tle League teams. Deal­ers ar­range most loans for auto buy­ers. Com­mu­nity banks rep­re­sent more than 98 per­cent of the to­tal num­ber of U.S. banks.

The con­sumer bureau will write and en­force rules for fi­nan­cial ser­vices and prod­ucts. It can ban con­fus­ing fine print on loan doc­u­ments — ex­cept when the loans come through auto deal­ers. And it can pun­ish banks for of­fer­ing de­cep­tive loans — un­less they’re com­mu­nity banks. Auto deal­ers, in­clud­ing those that sell boats, mo­tor­cy­cles and recre­ational ve­hi­cles, won a blan­ket ex­emp­tion from the new con­sumer pro­tec­tion bureau.

Com­mu­nity banks scored a smaller but cru­cial con­ces­sion: They’re sup­posed to fol­low the bureau’s rules — but the bureau can’t force them to. That duty rests with ex­ist­ing fed­eral bank agen­cies and state au­thor­i­ties, but those agen­cies failed to crack down on many of the abuses

‘You’re go­ing to end up with reg­u­la­tory gaps that can hurt con­sumers.’

Travis Plun­keTT Leg­isla­tive di­rec­tor of the Con­sumer

Fed­er­a­tion of Amer­ica

that led to the cri­sis. That’s a big rea­son why a new fi­nan­cial pro­tec­tion bureau was deemed nec­es­sary.

The ex­emp­tions for auto deal­ers and com­mu­nity banks — de­fined as those with less than $10 bil­lion in as­sets — hint at their in­flu­ence in Washington. They suc­ceeded even as lob­by­ing by the nation’s bank­ing giants failed to pro­tect those com­pa­nies from the new bureau’s strictest over­sight.

The Na­tional Au­to­mo­bile Deal­ers As­so­ci­a­tion be­gan bar­rag­ing con­gres­sional of­fices with phone calls and e-mails as early as last fall. As a vote neared, deal­ers vis­ited Washington to plead their case to law­mak­ers, ac­cord­ing to Ed Tonkin, NADA’s chair­man.

“This is a govern­ment over­reach into pri­vate busi­ness,” Tonkin said. “Deal­ers are not banks, and we shouldn’t be sub­ject to bank rules.”

Yet be­cause they act as a go-be­tween, con­sumer ad­vo­cates say, auto deal­ers fill the same role as the mort­gage bro­kers who fed the hous­ing cri­sis by push­ing high-risk loans. Some auto deal­ers have been ac­cused of mis­lead­ing bor­row­ers about fi­nanc­ing terms and of push­ing them into loans with higher in­ter­est rates than their credit scores war­ranted.

NADA de­nies this. It says the money deal­ers make from ar­rang­ing con­sumer loans from banks is slight. It notes that the mi­nor­ity of auto deal­ers that lend di­rectly to con­sumers still would be reg­u­lated. And it warns that the cost to deal­ers of com­ply­ing with new reg­u­la­tions would drive up the cost of cars.

Deal­er­ships na­tion­wide num­ber about 18,000. And nearly 8,000 com­mu­nity banks dot the coun­try.

“They have that in­cred­i­ble grass-roots power, and that’s why they got the loop- holes and the carve-outs they did,” said Ed Mierzwin­ski, con­sumer pro­gram di­rec­tor at U.S. Pub­lic In­ter­est Re­search Group.

The auto deal­ers’ suc­cess­ful ar­gu­ment to Congress — don’t pun­ish Main Street for Wall Street’s sins — was echoed by com­mu­nity banks. Com­mu­nity banks, which in­clude thrifts and de­pos­i­tor-owned banks, cater to home­buy­ers, de­vel­op­ers, small busi­nesses and farm­ers, among oth­ers.

How­ever, small banks doesn’t nec­es­sar­ily mean smaller risks. Com­mu­nity banks ac­count for nearly all the 226 banks in the U.S. that have failed since the start of 2009.

The In­de­pen­dent Com­mu­nity Bankers of Amer­ica spent nearly $1.1 mil­lion in the first quar­ter on lob­by­ing on bank reg­u­la­tion, the new con­sumer pro­tec­tion bureau and other is­sues. That was 15 per­cent more than it spent in the first quar­ter of 2009.

The com­mu­nity banks’ in­flu­ence goes be­yond those dol­lar fig­ures. Lo­cal bankers are big donors in hun­dreds of con­gres­sional races — like those that will be de­cided this fall. They sup­ple­mented their trade group’s spend­ing with vis­its and phone calls.

As with com­mu­nity banks, pres­sure from in­di­vid­ual auto deal­ers helped sway Congress. Such phone calls and vis­its aren’t re­quired to be re­ported as lob­by­ing.

Con­sumer ad­vo­cates hold out hope for ex­tend­ing the bureau’s full over­sight to auto deal­ers and com­mu­nity banks. They note that Congress pre­served the Fed­eral Trade Com­mis­sion’s author­ity to fight de­cep­tive prac­tices by deal­ers.

They also say they’ve raised aware­ness of the is­sues with law­mak­ers — ground­work for fu­ture reg­u­la­tion.

“We lost a cou­ple of bat­tles,” Mierzwin­ski said, “but we won the war.”

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