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 get a community bank to extend you a credit line, be sure to read the fine print.
Thanks to their lobbying muscle 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 peddling of financial services products that led to 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 derives 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 account for more than 98 percent 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 if 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 RVs, won a blanket exemption from the new consumer protection bureau.
Community banks scored a smaller but still crucial victory: 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. Those same agencies failed to crack down on many of the abuses that led to the 2008 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 — reflect their vast 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, the NADA chairman.
They argued that auto dealers had been unfairly swept up in the zeal to rein in Wall Street’s excesses. They noted that dealers merely arrange most auto loans, linking customers with lenders, and are already subject to regulations on auto financing.
“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.
The 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.