After decade of inaction, FTC holds meeting on auto financing concerns

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Tammy Moses of Oklahoma City bought what she thought was a brand-new Hyundai Elantra, but later discovered that the car was a rebuilt wreck -- a sales tactic allowing dealers to inflate the value of the vehicle and the loan.

David Heath/Center for Public Integrity

When Congress blocked a new consumer agency from overseeing loans made by auto dealers last summer, it also gave an old agency – the Federal Trade Commission – enhanced powers to stop predatory auto loans.

At a public meeting today in Detroit, the FTC turned its attention to some of the problems spotlighted in the Center for Public Integrity’s investigation of how auto dealers borrowed financing techniques from the playbook used by mortgage lenders.

“The dealer has a significant amount of influence over the terms and availability of credit” for car buyers, especially those with low credit scores, Chris Kukla of the Center for Responsible Lending told the meeting. The pro-consumer group surveyed 1,000 consumers and found 85 percent of them did not know auto dealers could charge a higher interest rate than what they qualified for, he said.

“The interest rate is supposed to compensate for the risk that each individual risk presents for that lender,” Kukla said. “We saw this in the mortgage markets. When you build compensation into the interest rate, it’s impossible for the consumer to know what part of my rate is for the risk, and what part of my rate is for compensation.”

Auto dealer David Westcott, president of Westcott Buick GMC Suzuki, said about 70 percent of his customers finance car purchases through his dealership, and most are knowledgeable buyers. “Consumers are much more informed, not only about the car but about the entire process, than they were 10 or 15 years ago,” he told the meeting.

Consumer advocates hope that the FTC will use its new powers to crack down on abusive behavior after years of doing little or nothing. Under the sweeping Dodd-Frank financial reform law, the FTC will be able to expedite rulemaking when it comes to auto loans.

But not everyone is impressed with the FTC’s track record. Rosemary Shahan, who founded the nonprofit Consumers for Auto Reliability and Safety, says the agency has done little to reign in abuses by auto dealers over the years.

The Center for Public Integrity reviewed all agency enforcement actions and found the last time the FTC took action against an auto dealer was a decade ago.

Joel Winston, associate director of the FTC’s financial practices division, told the Center recently that enforcement actions will continue to be a shared responsibility between the FTC and state attorneys general.

The FTC, which says it will hold at least three public meetings on auto financing, webcast its first one today in Detroit here.   

The agency was ambiguous about what, if anything, it plans to do with the information it collects from the meetings. In its announcement of the public meetings, the FTC said it would “gather more information on consumer protection issues in connection with motor vehicle sales, financing, and leasing to assess the propriety of promulgating a rule or conducting other initiatives.”

 

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