It Makes Sense to Exempt Dealers from Finance-Reform Legislation

Let’s play deductive reasoning. Mel Gibson abuses his girlfriend. He’s an actor. Ergo, all actors abuse their girlfriends.

Sounds flawed? How about this? A slim shady bamboozles a customer. Mr. Shady works at a car dealership. Therefore, all dealerships employ crooks.

Yet that’s the apparent logic of many critics who are throwing tantrums because Congress exempted dealers from a reform bill aimed at financial institutions.

Some misguided people fervently think dealerships belong in that group. Considering the level of righteous indignation over the dealer exemption, you would have thought Congress renamed July 4th as Bernie Madoff Appreciation Day.

Here’s some logic that works. The financial-reform bill addresses lenders. Dealers aren’t lenders. So, the bill should exclude dealers.

To say the legislation should include them is like holding BP service station operators responsible for the Gulf of Mexico oil leak.

Critics apparently are stuck on the fact that dealers help some of their customers get car loans. But dealers don’t dole out the loans. They simply connect car buyers with lenders.

Regardless, miffed bloggers and the like are putting their anger on record, distorting the record and sounding like broken records.

Some of them write for respectable publications. In the New York Times, Ron Lieber goes down a list of dealer wrongs he claims the new legislation might have righted had not dealers won that exemption.

One cited "tactic" is “the yo-yo problem” that he says “will probably escape oversight by the new (oversight) agency because auto dealers, not banks, perpetuate it.”

At issue is the sometimes risky business of spot deliveries. Those occur when a lender tentatively approves financing terms, the dealer hands over the keys to a new car and the customer drives off.

Most of the time, everything ends up fine. But sometimes, the customer gets a call from the dealership saying the lender, upon further investigating submitted credit information, has hiked the interest rate.

The customer is then asked to returned to the dealership (or, as Lieber puts it, is reeled back in, “hence yo-yo”) to sign a revised contract with a higher interest that is more in line with the borrower’s true financial situation.

Lieber admits it is “rare” for a dealer to intentionally pull some sort of bait-and-switch involving a loan rate.

What he fails to note is that the auto-retailing industry shuns such malice aforethought and state laws forbid it. Luring in customers like that is a good way to land a state attorney-general investigator at your door.

So if willful yo-yoing already is outlawed, why do we need a new federal law banning it?

Dealers who intentionally pull fast ones on their customers deserve punishment. But in the vast majority of cases, a spot delivery that goes bad has nothing to do with dealer trickery.

Instead, it has a lot to do with consumers fudging information on credit applications. If banks discover such misrepresentations, of course they will want to adjust loan terms.

If dealers are guilty of something in such situations, it’s not conning customers, but aiding and abetting them in dubious truth-stretching ways to improve their credit scores.

“It’s easy for a short-order cook to become a ‘chef’ (on a loan application) and for gross pay to become net,” Peter Brandow, a dealer veteran and Ward’s Dealer Business columnist, tells me. “All of this information could lead to a shared responsibility for the credit application that can be problematic.”

The dealer transgression is in helping the customer too much. It’s something lenders and dealers need to address between themselves. And they are.

These days, lenders are demanding veracity in credit-application information that dealers forward them. They’ll drop a dealer who jams them on behalf of a customer.

It’s illogical to think this country needs a consumer-protection law to fight that.