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Published: October 2009

Protect car buyers under consumer watchdog agency

Coalition: Americans for Financial Reform

Consumer Action, along with 29 other organizations, signed on to a letter asking Congressman Barney Frank to ensure that all aspects of car financing are covered under the proposed Consumer Financial Protection Agency (CFPA).

Below is an excerpt from the letter:

We strongly urge you to ensure that all activities of auto dealers related to the financing of cars are fully included under the jurisdiction of the Consumer Financial Protection Agency.  While we agree that the sale of just a car, where car buyers pay cash or obtain their own financing, should not fall under the supervision of the agency, loan financing represents a huge source of income for auto dealers.  Increasing percentages -- currently a majority -- of dealer profits are derived not from the sale of the car itself, but rather from their “Finance and Insurance" departments, where seasoned, trained F & I managers, paid largely on commission, use sophisticated software programs to maximize the profits from the financing and add-ons in car sales transactions.    

While the vehicles themselves have never been better, auto sales and financing practices have never been worse.  In fact, year after year, auto sales and service complaints, typically related to predatory lending practices at dealerships, rank number 1 among consumer complaints lodged with state and local consumer protection agencies.   Since motor vehicles are the second-largest purchase most consumers make, and the average price of a new car is now more than $28,000, relatively few car buyers can afford to pay cash. As a result, most moderate and low income consumers are vulnerable to predatory auto lending.

While improvements by manufacturers and increased safety regulation mean consumers can purchase vehicles far superior to those sold a decade ago, unfortunately, there have not been similar improvements in the quality of financial products in car sales transactions. Consumers desperately need federal protection from ubiquitous predatory auto lending practices and multi-billion dollar auto sales frauds.  Because dealers are selling both the car and the financing at the same time, often in addition to taking a trade-in with an outstanding lien balance, it is impossible for consumers, or regulators, to separate the two transactions.

Dealers also profit from the loan financing through a shady tactic known as "loan packing."  This involves dealers using the fact that they are selling both the car and the financing to include overpriced add-ons, while deceiving the buyer about the cost.  These add-ons include credit insurance products such as credit life insurance and credit disability insurance as well as “GAP” insurance plans that claim to cover the difference between the over-priced car loan and the true value of the vehicle, in the event of a collision or theft. 

In order to effectively regulate auto financing, the CFPA must have authority to comprehensively regulate all financing-related activities of the dealers, including:

• Selling retail installment contracts to lenders
• Engaging in bait-and-switch financing, also known as "yo-yo" financing
• Engaging in "loan packing" -- misrepresenting the costs to finance over-priced add-ons
• Forging documents and/or signatures
• Failing to pay off outstanding liens on traded-in vehicles, as promised, aka "car kiting"
• Charging excessive, hidden dealer "markups" of interest rates
• Price gouging by Buy-Here-Pay-Here lots, where dealers carry their own paper
• Engaging in other predatory lending practices

Lead Organization

Consumer Federation of America

Other Organizations

A New Way Forward | Americans for Democratic Action | Americans for Fairness in Lending | Americans for Financial Reform | Arizona Consumers Council | Calegislation | California Public Interest Group (CALPIRG) | Center for Responsible Lending | Consumer Assistance Council (Massachusetts) | Consumers for Auto Reliability and Safety | Consumer Federation of America | Consumer Federation of California | Community Reinvestment Coalition | Consumer Watchdog | Consumers Union | Demos | Empire Justice Center | Florida Consumer Action Network | Leadership Conference on Civil Rights | Maryland Consumer Rights Coalition | NAACP | National Association of Consumer Advocates | National Community Reinvestment Coalition | National Consumer Law Center, on Behalf of its Low-Income Clients | National Council of La Raza | National Fair Housing Alliance | National People's Action | Neighborhood Economic Development Advocacy Project (NEDAP) | New York Public Interest Research Group (NYPIRG) | Privacy Rights Clearinghouse | Progressive States Network | Public Citizen | Sargent Shriver Center on Poverty and Law | U.S. Public Interest Research Group (U.S. PIRG) | Virginia Citizens Consumer Council | Virginia Interfaith Center for Public Policy | Woodstock Institute

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