Dealers Aren't Lenders

Auto dealers do not give out auto loans, despite the odd claims of people hooked on histrionics.

Dealers serve as conduits between their customers and financial institutions that do the lending.

That is why dealers sought exemption from beefed-up rules in a federal financial reform bill. Why is it so hard for some people to grasp that, without resorting to dealer bashing and invoking tired dealer stereotypes?

Federal and state laws already subject dealers to all sorts of regulations. Part of their cost of doing business is paying lawyers and compliance experts to make sure their dealerships are in accordance with that slew of rules.

Although sometimes begrudgingly, dealers accept regulations that directly affect them. What they say about the proposed Wall Street Reform and Consumer Protection Act is that it doesn’t pertain to them any more than lemon laws apply to lenders.

Yet some consumer-rights activists are livid that dealers oppose this legislation. Asks one critic: “Why would auto dealers object to being treated like other lenders?” That’s an easy one. Because they are not lenders.

A Huffington Post blogger claims dealers used their power of campaign contributions to prod a majority of Senators to recommend exempting dealers from the finance-reform bill.

Among those Senators is Majority Leader Harry Reid who voted for the exemption along with 19 other Democrats and all the Republicans in one of Washington’s rare bipartisan displays lately.

Huffs the Huffington Post blogger: “It probably didn’t hurt that Sen. Reid received $16,845 in campaign contributions from auto dealers during the 2004-2009 period.”

Hey, they sure dropped the dough on him. It works out to $3,369 a year.

The blogger who insists dealers are lenders reaches back to 1991-2000 in citing a racial-discrimination case involving thousands of Nissan auto loans.

What he fails to mention is that those higher-interest loans originated from Nissan Motor Acceptance Corp., not dealers. The captive finance company, not dealers, settled a class-action suit.

Many people are horrified that some auto dealers make money by adding percentage points to interest rates of loans they facilitate. Most big dealers and dealership chains limit those so-called “reserves” to one or two points. Some opt to charge a flat fee for services rendered.

The Center for Responsible Lending calls these charges “kickbacks.” That’s a strong word, considering the net loan rates, even with dealer add-ons, often are lower than customers might have obtained on their own.

Here’s why: Because dealers work with a variety of lenders, they get the equivalent of a wholesale rate.

Moreover, many people with tarnished credit histories have a tough time getting car loans without dealer help. Many lenders will take a risk if a loan application originates from a dealer with whom they have trusted relations.

There is a healthy give-and-take between dealers and lenders. Lenders will tell dealers: “Don’t send us only high-risk loan applications.” Conversely, dealers will tell lenders: “Don’t approve only low-risk loans.” Third-party beneficiaries of the latter are people with blemished credit. They get loans they would not have ordinarily obtained, because the dealer includes their credit applications in a bundle sent to lenders.

It's not wrong for a dealer to charge a reasonable fee for making such loans happen and for getting better rates than the customers would have received if left to their own devices.

Incidentally, dealers also pay for the information-technology equipment and software that leverages those lending economies of scale and connects them with many different lenders so they can get their customers financed.

Bottom line, though, franchised dealers are in the business of selling cars, not financing them. Good dealers want to give their customers a fair deal on the vehicles they sell and the financing they expedite. That way, buyers come back for more.

As for the small number of dealers who may abuse their customer relationships? Well, existing regulations and potential lawsuits will take care of them. So will the marketplace, because consumers vote with their dollars. They hold the power to vote a bad dealer out of business.

A recent National Automobile Dealers Assn. campaign seeks to educate consumers about auto financing. The effort promotes transparency, offers tips and informs the public that car loans are negotiable. It's a well-advised initiative.

What's ill-advised is to call dealers something they are not. They are not lenders. A bipartisan majority of Senators got that one right, despite the squawks of jaybirds in the trees.