The Financial Reform law signed by President Obama in 2010 is intended to protect consumers and prevent another financial crisis that led to the 2008 recession. It may take years before we know if it will actually do what it's supposed to do, but it's clear that the law misses the mark in at least one crucial consumer area.
While the Dodd-Frank Wall Street Reform and Consumer Protection Act was making its way though the House of Representatives and Senate, there was a lot of debate about what should and shouldn't be included in the law. A major bone of contention concerned the creation of the new Consumer Financial Protection Bureau (CFPB).
At the heart of the debate was what financial transactions the CFPB would regulate. The House of Representatives' version of the law excluded or exempted auto dealers from the new, stricter lending CFPB rules that most banks and other lenders need to follow. The Senate version, on the other hand, wanted thousands of car dealerships covered by the law.
In the end, the car dealers got the exemption. And while they declared it a victory, consumers like you and me need to be careful when car shopping.
With the auto dealers' exemption from the Reform law and CFPB, car dealers are free to continue scamming unwary buyers through tactics such as:
- Financing Fell Through. Here, you find a car, sign a contract with an interest rate you like, and drive away. Then, a few days later, the dealer claims the loan company or bank refused your loan, but the dealer found you other financing. The problem is the interest rate is higher -usually much higher - than your original "deal"
- Interest Rate Markup. Auto dealers aren't banks, they get loans through banks and other lenders who give them deals on interest rates. When dealers work out financing for buyers, they're allowed to raise or markup those interest rates by as much as 3%, but the norm is around 2.5%. In the end, over the life of the loan, buyers may pay thousands of dollars more than they should have paid
- Add-Ons. Here, the dealer uses high pressure sales tactics to sell you things like having the car's VIN number etched into the windows as a security measure; life or disability insurance; and extended service contracts or warranties. Buyers are duped into paying for these things by dealers who say these add-ons are needed to get loan approval or "good" interest rates
No one can say for certain, of course, but it's likely that these and other shady practices could have been reduced or maybe eliminated if car dealers weren't exempted from the Financial Reform law.
What You Can Do
There are several things you can do to protect yourself when shopping for car:
- Get financing through your bank or credit union before you start looking, this way you avoid dealer financing altogether
- If the dealer is offering a good deal like "zero percent financing," apply for it online or over the telephone to see if you qualify before you go to the lot
- Know your credit score and the interest rate your score qualifies you for. This way you can spot any interest rate markup a mile away. You can get your score from your credit report
- Read your loan papers carefully to make sure no "add-ons" were slipped into deal while you weren't looking
- If you go with dealer financing, get the dealer to confirm your financing in writing before you sign a contract or drive off the lot
- If you've been a victim of shady lending practices, contact an attorney or file a complaint against the dealer with your state's attorney general's office or consumer protection agency
If you're careful, do some research, ask the right questions and demand good answers, your car buying trip will be easy and even enjoyable.
Questions for Your Attorney
- A dealer asked my daughter to lie about her income so she'd get a better interest rate. Is that legal?
- Can I cancel a contract if the dealer tries to raise my interest rate?
- Can a dealer sell my loan to another bank or lender without my permission?