Military Families: The Potential Victims of Proposed Auto Lending Carve Out

As the Senate considers the Wall Street reform bill, military families are continuing to fall victim to predatory lenders and abusive auto lending practices -- and lobbyists for the industry are hoping to make sure it stays that way by getting a carve-out into Wall Street reform.

Military families have been a target of unscrupulous lenders because of their demographic characteristics.  Often, for recently enlisted soldiers and sailors, their steady paycheck means the chance for deceptive lenders to lure them into easy credit offers.  And many experienced military families struggling with daily expenses such as child care in the face of deployments and frequent moves have become targets for deceptive lenders. 
 
Undersecretary of Defense Clifford Stanley recently sent a letter to Michael Barr, Assistant Treasury Secretary for Financial Institutions, that states the “personal financial readiness of our troops and families equates to mission readiness.”  He reports that 72 percent of military financial counselors surveyed had counseled Service members on auto lending abuses in the past six months.

How can this possibly be happening?

Wall Street buys and packages auto loans made by dealers into securities.  Wall Street pays dealers more for loans that have higher interest rates than borrowers qualify for.    This gives dealers selling to Wall Street a perverse incentive to charge higher rates.  This is the exact same dynamic that encourages abuses in the mortgage market and hurts community banks.  Like auto dealer-lenders, mortgage brokers are paid to sell loans at higher rates than borrowers qualify for.  Looking to get the highest commissions possible, mortgage brokers and some dealer-lenders steer families toward these Wall Street loans instead of towards the community banks and credit unions that often offer better loans.

This incentive leads some dealer-lenders to devise other ways to charge higher rates too.  Sometimes a dealer-lender sends the buyer home with a "purchased" car and calls a few days later to say that the financing “fell through.”  The dealer-lender gives the borrower the choice of giving up the car or paying a higher interest rate.

Dealer-lenders can also receive commissions to sell expensive add-ons to the loans, such as extended warranties.  Dealer-lenders can obscure the cost of add-ons, which can be thousands of dollars, by emphasizing that they only moderately increase the monthly loan payment.

At a time when thousands of servicemen and women are overseas, it is unthinkable that we are not taking the steps to shield their families from financial ruin and ensure they are not targeted and victimized by predatory and abusive lenders.

Those who argue that rules of the road will somehow make auto loans more expensive have it backwards.  The consumer financial protection agency will set strong, consistent rules of the road that will bring more transparency for consumers about what they're getting and what they're paying for it.  That means lower prices, higher quality, or both.

The consumer financial protection agency will put in place strong protections for consumers, including:

• For Mortgages.  The piles of forms needed for a mortgage can be overwhelming, and many lenders and brokers have taken advantage of that confusion to sell borrowers loans they couldn’t afford.  The consumer financial protection agency will be required to consolidate and simplify two overlapping and sometimes inconsistent federal mortgage forms. 
• For Credit Cards.  The consumer agency will enforce the new credit card law that bans rate hikes on existing balances and other unfair practices.  Military families who sometimes use credit cards to get by when times are tight will benefit from strong protections.
• For Overdrafts.  The consumer agency would help enforce new rules that give consumers a real choice as to whether to join expensive overdraft programs and make sure banks don’t find ways to unfairly manipulate consumers and to take away their choice.
• For Payday Loans, Credit Bureaus, Debt Collectors, and Other Nonbanks.  For the first time, a federal agency whose mission is to protect consumers for financial products and services would establish fair rules of the road for financial providers such as check cashers, payday lenders, credit bureaus, debt collectors, and mortgage brokers.

Jen Psaki is Deputy Communications Director