Burr vs. Marshall: Let’s Start With A Little Credit

I generally don’t say much on CitizenWill about Federal officeholders but since there’s been a lot of blather about Elaine Marshall’s chances of overcoming Richard Burr I thought I would submit one way she can challenge Burr’s reputation of supporting our troops.

Elaine, as part of her Senate campaign, started a petition calling on Burr to support a Consumer Finance Protection Agency.

Burr, so far, and his Republican colleagues have been less than supportive (to put it mildly) of the initiative.

In fact, Sen. Richard Shelby (R-Ala.),

ranking Republican on the Senate banking committee on Monday [June 21st, 2010] told a group of N.C. bankers that a proposed consumer financial protection agency is the “worst” part of an industry overhaul making its way through Congress.

“They will decide what products you can put out, to whom and probably at what price,” Sen. Richard Shelby, R-Ala., said in remarks at the N.C. Bankers Association’s annual meeting, held at a University-area hotel. “Can you imagine all this?”

Charlotte Observer, June 22nd, 2010

Senator Shelby, after Wall St. gamblers pissed billions of investor dollars down the drain, threw the economy into a historic tailspin and bamboozled American citizens into picking up the tab, I can well imagine having more oversight. For instance, “visualizing” restoration of the kind of protections we once enjoyed under the Glass-Steagall Act.

Shelby was visiting the Old North State “at a breakfast fundraiser for Burr attended by about 70 bankers”.

What does the Consumer Finance Protection Agency have to do with our military families?

The Department of Defense’s Office of Personal Finance specifically endorsed the creation of the CFPA [PDF] because, as Director Julian said, “DOD firmly believes that the financial readiness of their troops and families equates to mission readiness and anything that we can do to help our families be financially ready, we will support the family and the mission.”

That letter of endorsement starts by highlighting the effects predatory and unscrupulous lending practices by some automobile dealers have on our military families.

The excellent academic consumer credit ‘blog Credit Slips has posted a good overview of those reprehensible tactics:

So what are the problems in the auto lending world?  Here are some.  I’m guessing I’ll learn of some new ones in the comments.  I’m also guessing that auto leasing has its own bag of tricks.  

Bait and Switch.   There are lots of variations on bait-and-switch with auto dealers.  Here’s one: the dealer gives the consumer a quote on a particular model and says that it is in stock.  The consumer comes in and guess what–that model is still in stock, but only with a bunch of dealer-added features (hubcap locks, pinstripe, fog lights, etc.) that raise the cost of the car by more than the value given.  Want to guess why I’m driving a Honda Odyssey with a “racing pinstripe” on it?   

Hidden Fees.  This is sort of self-explanatory, and is another bait-and-switch variation.  The consumer bargains with the dealer over the price of the car and the financing and thinks that a deal has been reached.  Then the consumer gets the final bill for the car and it has a bunch of previously unmentioned fees.  The dealer says don’t worry, we’ll just increase the amount financed.  

Dealer reserve kickbacks.  These are the yield spread premiums of the auto world. The dealer often acts as a broker for a financing company that will finance the car purchase.  The dealer is compensated for this service by getting a slice of the interest on the loan.  The higher the loan rate, the larger the kickback.  So the consumer qualifies for a loan at 10%, but the dealer steers the consumer into a 14% loan in order to get a larger dealer reserve payment.  (One way to avoid being steered due to dealer reserve is to go in with a direct financing offer lined-up from an independent finance company; I wonder how many consumers do this, though.)  

Loan packing.  Overpriced and underused or frankly unnecessary products like credit life insurance and GAP insurance and rust-proofing get bundled in to the deal.  

Overselling.  Dealer’s cuts on loans can give them an incentive to steer consumers into larger loans.  One way to do that is to sell the consumer a more expensive car, which requires more financing.  Of course the consumer still has to be qualified for the loan, and there have been problems in auto lending, just as with mortgages, of dealers (and borrowers) fudging the numbers on the paperwork to make borrowers look more creditworthy.  

Spot delivery yo-yos.  This is one of the sleaziest moves.  The consumer buys a car with financing arranged through the dealer.  The financing includes a nonrefundable deposit.  The consumer takes the car home thinking that everything is in order.  The dealer then calls the consumer the next day to say that the financing was denied in the end and the consumer has to return the car.  And the dealer keeps the deposit. 

Binding mandatory arbitration.  This is a generic consumer finance problem.  

Such practices are familiar to folks who live in North Carolina’s host communities.

Unfortunately, the protections DoD asked for have been gutted by both Republican and Democratic (BOO!) House members.

Elaine can differentiate her candidacy not only from Burr’s but of her own Party by coming out strongly for specific remedies to this loophole.


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