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DODD ON EFFORTS TO CARVE OUT AUTO DEALER FINANCING

May 13, 2010

WASHINGTON – One day after the Senate overwhelmingly approved an amendment to protect military personnel with a new office within the Consumer Financial Protection Bureau the Senate is set to vote on an amendment to exempt auto dealers from the Bureau’s protections.
  
This week, the Secretary of the Army John McHugh sent Senate Banking Committee Chairman Chris Dodd (D-CT) a letter expressing strong concerns with such exemptions.  “Over the years, many of our Soldiers have fallen victim to predatory lending practices and have entered into contract for prohibitively expensive financial products promoted by some unscrupulous car dealers and lenders…We owe them the protection and oversight that would be afforded by the CFPA.”
 
“Soldiers who are distracted by financial issues at home are not fully focused on fighting the enemy, thereby decreasing mission readiness.  Protections from unprincipled auto lending enables our Soldiers to concentrate on their primary mission, protecting our Nation,” McHugh said.
 
Last night, Chairman Dodd spoke out in support of the new office for military personnel and discussed how damaging it would be for the Senate to turn around and exempt auto dealer financiers.  
 
“We are not talking about many auto dealers that engage in financing that cause problems… But we don't write laws for the many; we write laws for the few, those who will abuse their offices, abuse their operations in such a way as to cause harm to people who otherwise have no protection.”
 
“Here we have the Reed-Brown amendment that says we will establish within the bureau of consumer financial protection an office to protect the men and women in uniform from the abuses of people who would take advantage of them. Then less than 24 hours later we would take way protection for one of the major problems these young men and women have.”
 
“What is this institution saying? On the one hand, we say our young men and women in uniform ought to be protected from people who take advantage of them. Then less than 24 hours later we say: But, by the way, in a major area of abuse that occurs, you are exempt. Don't worry about it. The law doesn't apply to you. I am sorry, Mr. Community Banker. I am sorry, Mr. Local Credit Union. You will have to live by the rules.”
 
“I urge my colleagues, tomorrow, when we have an opportunity to debate the Brownback amendment, not be lured away from their support of putting an office within the Consumer Financial Protection Bureau and basically gut the very bureau before the ink is dry on the amendment by allowing for a massive exception which would allow for consumers, particularly men and women in uniform, to be taken advantage of.”
 
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Attached is the letter from Secretary McHugh.
 
Below are remarks delivered on the Senate floor by Chairman Dodd last night.
 
“I strongly support the amendment offered by our two colleagues from New England, Senator Jack Reed of Rhode Island and Senator Brown of Massachusetts. Both of these colleagues speak with some authority on this amendment. Jack Reed is a graduate of West Point and served in uniform for our country for a number of years with great distinction. Senator Brown has spent some 30 years in the National Guard in Massachusetts and also speaks with more than just passing authority about the importance of the amendment they offer.”
 
“It is a very important amendment because it sets the table for a debate tomorrow regarding a certain area of auto dealer financing. The amendment establishes an Office of Military Liaison within the consumer bureau we have created in the overall legislation.”
 
“In today's New York Times, there was a description of the case of Matthew Garcia, a 25-year-old Army specialist who was recently subjected to a trick called yo-yo financing by an unscrupulous car dealer, just as he was preparing to deploy to Afghanistan. According to the story, Specialist Garcia, stationed at Fort Hood, TX, bought an automobile at a used car lot and signed up for a loan at a 19.9-percent interest rate. That is not even the abuse, believe it or not, as high as that rate is. The problem came when Specialist Garcia drove the car home. The dealer called Specialist Garcia several days later to say that the financing contract had actually fallen through and demanded an additional $2,500 in cash. To make sure he paid up, the dealer blocked the soldier's car in so that no one could leave. That is the way some--few but some--auto dealers are treating our men and women in uniform. That is why we need the Office of Military Liaison within the Consumer Financial Protection Bureau.”
 
“Unfortunately, the story of Specialist Garcia is not unique. It is all too common, whether it is in the area of auto financing, payday lending, mortgage lending, check cashing, these unregulated areas of finance so many of our fellow citizens are subjected to on an hourly basis, let alone a daily one.”
 
“Creating an office within the Consumer Financial Protection Bureau to focus on the problems of our young men and women in the military and their families is an important contribution to this legislation. I thank both of our colleagues for offering this proposal.”
 
“The office we are creating with this amendment will help resolve many of the complaints brought to the office by our service men and women. It will help advise the director of the bureau's rule writing to take into account the special needs of military families. By doing this, it will help our military readiness as well.”
 
“I have letters from the Under Secretary of Defense and the Secretary of the Army, sent to me and to others, laying out the value of having some protection within the automobile financing area.”
 
“It is important we have this language in the bill. Let me emphasize as well that unfortunately we are not talking about many auto dealers that engage in financing that cause problems, but, like most laws on the books, if they were only written because there were a majority of people committing the offenses, it would be hard to make the case against them. But we don't write laws for the many; we write laws for the few, those who will abuse their offices, abuse their operations in such a way as to cause harm to people who otherwise have no protection.”
 
“I have talked a lot about the Consumer Financial Protection Bureau over the last number of days. The importance of this is that for the first time in the history of our country, individuals who are taken advantage of in the financial services sector will have someplace to seek redress for the grievances to which they have been subjected. I don't think this is a radical idea, particularly in light of what so many of our fellow citizens have been through over the last several years where homes have been lost, jobs lost, the tremendous abuse that has occurred in too many of the areas of what I call the shadow economy, the unregulated areas of our economy.”
 
“The most important purchase the average American makes is buying a home, and we all know what can happen, as we have seen with brokers and mortgage lenders who were unregulated taking advantage of people by getting them into situations they knew they couldn't afford. People say it ought to be buyer beware. I don't argue with that. Obviously, we all bear responsibility to be better informed about financial arrangements. But to suggest this is a level playing field when it comes to home mortgages or car financing is to belie the facts. The analogy may not be perfect, but it has some value.”
 
“We don't expect patients necessarily to be as well informed when they are making decisions about their health care. There is something called medical malpractice. Obviously, we have an obligation to ask questions before we submit ourselves to surgery or other things. But we know in the end that if a doctor has abused the Hippocratic Oath and put a patient at risk, there is an ability to seek redress of those harms. It is called medical malpractice. It allows a person who has been injured or harmed because of the misfeasance or malfeasance of someone in the medical profession to get recovery. We understand it is not exactly a level playing field when the average person is trying to make intelligent decisions about their medical care.”
 
“The same could be said for mortgage lending. You can't expect the average person to understand all of the details, necessarily, involved. I suggest there is a higher degree of responsibility in the area of mortgage financing by a borrower than there would be necessarily in the case of medical malpractice, but nonetheless there are some legitimate comparisons.”
 
“Some have suggested mortgage malpractice may be an appropriate description for what happens when you are across that table from a lender. You have picked out the home you have fallen in love with. Your family is excited about this new place. In many instances, it is the first home you are buying. The idea that you will have your own home to raise your family in is a very emotional time. That lender across the table who is being unscrupulous in his or her behavior can extract commitments, and so forth, from that borrower that could put them at a distinct advantage. We believe in those instances there should be good underwriting standards by law. And if there is some harm done through the misfeasance or malfeasance of someone in the mortgage lending business, you can get some redress when that occurs.”
 
“Car financing is not the same as a home mortgage, but if you are an 18- or 19-year-old young person in uniform and you find that automobile you love and you are so attracted to it--I am not suggesting borrowers don't have a responsibility to be well informed--most Americans know what happens. All of a sudden, you end up like Specialist Garcia. You think you have bought the automobile. And at 19, almost 20 percent financing, that in itself ought to be illegal. But the fact that you then find you have a $2,500 extra charge and the wheels have been blocked so you can't drive away--that is the kind of individual who ought not to be allowed to continue to operate under those circumstances.”
 
“We believe when it comes to financing such as this we should not say to one sector: You are exempt; we will carve you out; you don't have to worry about any of the laws.”
 
“We make that local banker, who also might like to extend that loan, subject to the law's protections. The credit union is subject to the same laws. Why should someone engaged in the financing of a product--an automobile--be exempt? The local bank isn't. They have to meet their requirements under the law to make sure they are not abusing--not that many do but some do--the rights of an individual and protect them from a disadvantage in that second largest purchase a person may make aside from their home.”
 
“I know tomorrow there will be a debate. Senator Brownback will offer an amendment to exempt auto dealers and financing. Auto dealers are not covered. If you are a dealer, you are not affected by this any more than you are if you are a butcher or a dentist or any other retailer merchant. If you are in the financing business, you are the one who is engaging in that contract despite the fact the papers may have been written up by some other lender that is doing business with the auto dealer. Shouldn't we provide to that individual the same kind of protection they would expect if they went to the local bank, the community bank to get a car loan or to the credit union to get a car loan? We require them to meet basic rules, not exaggerated rules but basic protections so you are not taken advantage of.”
 
“I have a wonderful relationship with the auto dealers in my State. I fought hard for them last year. The program we had on the clunkers that allowed for people to turn in older automobiles, I fought hard for that. I have a great relationship. In fact, they offered me a nice award last year for my efforts on behalf of auto dealers in my State. I am very proud of it. The overwhelming majority of my dealers, as I know is the case in all of our States, do a good job and are fair. They wouldn't be in business very long if they did not. But all of us also know there are people who take advantage. Certainly to be exempt from any kind of rulemaking when it comes to protecting people ought not to be the decision we are making.”
 
“Here we have the Reed-Brown amendment that says we will establish within the bureau of consumer financial protection an office to protect the men and women in uniform from the abuses of people who would take advantage of them. Then less than 24 hours later we would take away protection for one of the major problems these young men and women have.”
 
“What an irony. What is this institution saying? On the one hand, we say our young men and women in uniform ought to be protected from people who take advantage of them. Then less than 24 hours later we say: But, by the way, in a major area of abuse that occurs, you are exempt. Don't worry about it. The law doesn't apply to you. I am sorry, Mr. Community Banker. I am sorry, Mr. Local Credit Union. You will have to live by the rules.  So there is a great disadvantage at the local level. The community bankers and credit unions are rightfully annoyed that they may be subjected to one set of rules and the person down the street who finances an automobile for an unsuspecting purchaser is exempt. That doesn't make any sense to me.”
 
“I hope that tomorrow my colleagues will react as I am to this. Again, I am not in any way indicting automobile dealers--quite the contrary. They have been through an awful lot. They have seen the struggle with major problems of the industry in this country. We made major efforts here to get them back on their feet. I am proud to have been involved in that, to see to it we restore and maintain a strong manufacturing sector in our country of automobile dealerships and manufacturers. But to turn around at the local level and say: I will give you a pass on those who would abuse the law and take advantage of people--in fact, it is an invitation to do it. It seems to me, by carving this out, we are not just sending a message to those who are presently engaging in this but to those who may decide this isn't a bad area of business in which to get involved.”
 
“The local bank has to meet those obligations and the local credit union or some other financing operation covered under our legislation. Now we will no longer have shadow operators. We cover payday lenders. We cover the check-cashing operations involved in financial services or products. But in the second largest purchase the average American ever makes, you are going to be exempt from any of the laws involving consumer protection when it comes to financing.”
 
“I know there is a lot of pressure, a lot of lobbying going on all over the place to carve out this exception. But I urge my colleagues to please be careful about this, to walk in tomorrow and to basically gut the Reed-Brown amendment by saying in this one major area of abuse--read the letter from the Under Secretary of Defense. Read the letter from the Secretary of the Army. Listen to our colleagues who are listening to the people on their military bases in the respective States, what goes on every single day by those who take advantage of people who are in uniform.”
 
“I urge my colleagues, tomorrow, when we have an opportunity to debate the Brownback amendment, not be lured away from their support of putting an office within the Consumer Financial Protection Bureau and basically gut the very bureau before the ink is dry on the amendment by allowing for a massive exception which would allow for consumers, particularly men and women in uniform, to be taken advantage of.”
 
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Click here to view letter by Secretary McHugh.