Car dealers write more than $250 billion in consumer loans every year, but Congress is on the verge of creating a Consumer Financial Protection Board and exempting car dealers from its scrutiny.
If the dealers win this battle, it would cap a long and costly lobbying campaign. As one critical part of that campaign, the auto dealers present themselves as part of Main Street with no ties to the high finances of Wall Street, but that image is more nostalgia than reality.
Several times this year members of the National Auto Dealers Association flew to Washington to see their local lawmakers and emphasize why car loans shouldn't be regulated the way other loans would be.
"What the neighborhood automobile dealer does is offers convenient access for consumers to credit," Ed Tonkin, the association's chairman, said during one of those fly-ins.
The key phrase: neighborhood dealers -- not the tycoons of Wall Street who set up the 2008 crash.
"Dealers are not banks," Tonkin said. "We shouldn't be caught in that same sweeping regulation."
One Man's Story
But lawyer Thomas Domonoske, who is with the Legal Aid Justice Center in Charlottesville, Va., says he would tell Congress about a different neighborhood dealer.
Domonoske, who has long experience fighting lawsuits over car-financing fraud, has an elderly client living on $800 a month in Social Security payments and paying $300 a month on his car. Domonoske says the client saw an ad from a local dealership promoting loans that would result in lower car payments.
"He responded to the ad, walked on the lot and said, 'I need to lower my monthly payment. I want to pay less than $250 a month,' " Domonoske said.
The client talked to several people and signed two different sets of documents, after which the loan was made.
Then, Domonoske says, the dealership sold that loan to one of the nation's largest banks. But first, he says, someone at the dealership changed a few facts.
"They indicated that he owned his own home, even though he was a renter, that he received a second source of income from a job, and they showed a total income of around $1,800 a month," he said.
So the man who walked in asking to pay $250 a month and was told he would pay $250 a month ended up paying $425 a month.
Domonoske is helping the man fight to get out of the loan.
Mortgage Market Parallels
Michael Hudson, a staff writer with the Center for Public Integrity who covered the subprime mortgage market, is now looking into the way auto dealers sell loans.
"According to lots of consumer complaints, and statements by whistle-blowers who have filed lawsuits against their former dealerships, there's a lot of the same practices that were going on in the mortgage market ... going on in the auto financing market," Hudson said.
He says that's because the market is amped up by Wall Street just like the home mortgage market was five years ago.
The National Automobile Dealers Association, which represents new car dealers, declined to comment for this story until the legislative exemption is approved. But its lobbying campaign is all about contrasting its industry with the mortgage market.
The industry's biggest proponent in the Senate, Kansas Republican Sam Brownback, made the case during floor debate last month.
"They are the quintessential Main Street business throughout the country," Brownback said. "There's not a single auto dealer on Wall Street, none of them. Not a one."
Ties to Wall Street
Maybe not, but nowadays auto loans are securitized, or repackaged and sold to investors. It's an essential part of auto retailing as profit margins shrink on the vehicles themselves.
"Auto dealers wouldn't make money today, in today's market, were it not for the fact that they extend loans and leases to customers," said Raj Date, a former financial industry executive who runs the nonprofit Cambridge Winter Center for Financial Institutions Policy. "As it turns out, when you get your loan from your car salesman, more than 70 percent of those loans ultimately are funded either by Wall Street bond houses or Wall Street asset-backed securities houses."
Those are the same institutions the auto dealers disparage on Capitol Hill.
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