The Costs of a Loophole

When you hear about "Wall Street Reform" or the "army of lobbyists" descending on Washington, it may feel disconnected from your day-to-day life.

But the consumer financial protection agency is one area of reform where the direct impact on the lives of American families is easier to see.

Whether you’re talking out a mortgage, an auto loan, payday loans, or just holding a credit card, this agency will make sure lenders deal squarely with you, lay out the terms in plain English, and stop using hidden fees to fatten their profits. It will make sure that all financial firms play by the same basic rules of the road. 

Last week the Senate wisely defeated a massive Republican amendment that would have decimated this agency in one fell swoop.  But now the lobbyists are working overtime to insert specific loopholes in the bill.

We recently discussed one of best examples of this -- the lobbyists' push for an auto lenders loophole, and the push against such a loophole from military families who are too often targeted by their deceptive practices.  Now, with efforts to insert this loophole headed toward the Senate floor, it's worth taking yet another look.

A USA Today editorial last week debunked the main argument lobbyists are making that reform should only protect consumers against Wall Street banks, pointing out that "While auto loans were not the prime generator of the recent credit bubble, many were sold and securitized the way subprime mortgages were. That's a recipe for excess."

But again, this is not some theoretical debate, if included they could cost countless American families their stability.  Last week, a story out of the Milwaukee Journal Sentinel gave an example of the kinds of auto lending abuses that reform aims to stop:

Robert Mims . . . works two jobs to make the car payments on a 2005 Ford Taurus he bought four years ago for about $13,000. The payments - about $17,000 so far - already amount to more than what the car is worth, but he's nowhere near paying off his car loan.

Mims. . . left the dealership under the impression that the lender would lower his 24.9% interest rate if he made his payments on time for six months.  He says he kept his end of the bargain, but the dealer did not.  Four years later, he still hasn't been able to negotiate a lower rate despite making his payments on time, and most of the payments he's made continue to go toward interest.

As Diana Farrell, Deputy Director of the White House National Economic Council, said, "Why should a bank be treated differently than an auto dealer in providing you money?   If they're offering good, transparent, fair financing products to their customers, they have nothing to worry about."  Responsible dealers will fare better if irresponsible dealer-lenders are stopped from inflating their profits through deceptive pricing and side payments from Wall Street.

Dan Pfeiffer is White House Communications Director