Feds to steer consumers away from predatory auto loans

(8/25/2011) ERATE Exclusive - It's about time tougher federal regulations are coming down the pike for auto dealer loans and you can give the regulators your two cents worth.

Eight out of 10 car buyers unwittingly accept loans from the auto dealers and many of those loans are packed with the same kind of kickback that is now illegal in the mortgage lending industry, according to the Center For Responsible Lending (CRL).

The fees can cost consumers from $1,200 to $1,700 over the life of the loan, according to CRL's "Under the Hood: Auto Loan Interest Rate Hikes Inflate Consumer Costs and Loan Losses."

The culprit is the "dealer reserve," a kickback auto dealers receive for selling customers loans with higher interest rates, even when customers can qualify for a lower interest rate.

Such auto loan padding is a lot like yield spread premiums (YSPs) and other predatory mortgage lending practices that contributed to the economic meltdown. YSPs, commissions mortgage brokers were once paid to steer mortgage borrowers to more expensive home loans, were outlawed earlier this year.

Auto consumers can avoid dealer reserve fees, other unnecessary loan cost run-ups and high interest rates by driving a hard bargain.

That means studying auto loans before shopping for a car, shopping around at a variety of lenders and keeping auto financing and price negotiations separate.

CRL says kickbacks, and other lures to get consumers to take on abusive auto dealer loans, have been largely unknown until recently thanks to its work and new Federal Trade Commission (FTC) oversight authority.

The FTC has been holding fact-gathering sessions called "The Road Ahead: Selling and Financing Motor Vehicles," around the country to gather information on consumer protection issues that may arise in the sale, lease, or financing of motor vehicles.

The first event was in Detroit, MI, April 12 this year, the second in San Antonio, TX on August 2 and 3. As many as five are planned and anyone can comment on the issue online at the FTC's website or by writing, following guidelines for public comments.

The FTC says having access to a motor vehicle is essential for many consumers to fulfill their daily obligations. However, it can be the most expensive purchase ever for some consumers, particularly for those who never buy a home. Because of the cost, most consumers finance the deal and need protection from predatory loans.

CRL says the predatory auto loan problem is particularly acute for military personnel.

A report by the National Consumer Law Center,, "In Harm's Way At Home: Consumer Scams and the Direct Targeting of America 's Military and Veterans" found that clusters of predatory lenders, including those offering high-cost auto loans, exist near every U.S. military base.

For more information, visit "The Road Ahead: Selling and Financing Motor Vehicles" online.

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