In the movies and on TV they're easily recognizable by the plaid coat, slicked back hair and too-good-to-be-true sales pitch. In real life they aren't so easy to recognize and are scattered across the country in locations conveniently selected to prey on young, lower-income, less financially savvy individuals, many of whom serve in our country's military.
Predatory auto dealerships are just one of the institutions on the list to be reined in by the financial regulatory reform bill before Congress. A provision in the bill would place auto dealers under the authority of the new Bureau of Consumer Financial Protection. But the Senate has requested to insert a provision into that bill to exclude auto dealers from rulemaking, supervision or enforcement by the BCFP.
The Pentagon has weighed in on the issue, supporting the inclusion of auto dealers under the supervision of the BCFP and against the amendment over concern that many members of the military fall victim to the practices of predatory lenders.
In a Feb. 26 letter to Michael Barr, assistant secretary for financial institutions, Clifford Stanley, undersecretary of defense for personnel and readiness, wrote, "While each military service includes car buying and financing classes as part of its normal financial educational curriculum, there are still documented cases of service members falling victim to predatory practices and prohibitively expensive products."
Stanley went on in the letter to cite an informal, nonscientific polling done by the Department of Defense of military personal financial managers that found 72% of the 659 counselors surveyed said they counseled service members in the past six months on one or more issues of "bait and switch financing, falsification of loan applications or other documents, failure to pay off liens on trade-in vehicles, packing loans with items whose price tag bears little or no relationship to their actual cost or value and discriminatory lending."
CUNA came out in opposition to the amendment proposed by Sen. Sam Brownback (R-Kan.) in a May 10 letter to Senate Banking Committee Chairman Sen. Chris Dodd (D-Conn.) and Ranking Member Sen. Richard Shelby (R-Ala.).
"Excluding any nondepository institution provider of financial products, including auto dealers, from the rules promulgated by the BCFP would defeat the purpose of creating the new consumer regulator, would put credit unions at a competitive disadvantage in the new regulatory regime, and could cause confusion for consumers of financial products," CUNA President/CEO Dan Mica wrote in the letter.
Ron Fields, CEO of Pen Air Federal Credit Union in Pensacola, Fla., which serves civil service and military employees and their families as part of its membership base, said that the Navy has passed an internal rule that no personnel are allowed to take out payday loans and that auto loans taken out by personnel should first be reviewed by the Navy.
"The Navy has been very active on this issue because they see what happens with payday loans and buy here, pay here auto loans. Members of the military and their families are taken advantage of," he added.
Pen Air holds seminars on the military bases it serves to help educate service men, women and their families on budgeting and the dangers of predatory lenders. In particular, the credit union works with the commanding officers on the bases to hold sessions for new personnel during orientation. The credit union also offers a payday alternative loan that it is currently working on repackaging to make it more military-friendly.
"These service men and women come from basic training and are making a little more money and are living on base, so they have no expense for food or housing. They think they are living good. A lot of times these are young kids that are on their own for the first time, and they see all this enticing stuff they have to pass by when they are on leave," Fields said.
During the seminars and sessions, Fields said that the credit union tries to drive home the point that having payday loans and bad auto loans on a credit report will hurt an individual's chance of moving up in rank and getting good security clearance.
At Navy Federal Credit Union in Vienna, Va., Tony Gallardy, vice president of consumer/credit card lending products, said that they have a member-preferred auto dealer network to help steer members away from predatory dealerships.
The network consists of dealerships that have historically provided good pricing and service to members.
"A very important segment of our membership is our young military personnel. Through our many years of service to the military, we have understood that this group is frequently a target of predatory dealerships. Our young service personnel generally have little to no experience with purchasing a vehicle, and can become easy victims to predatory dealers located nearby military bases," Gallardy said.
On the Navy Federal website, www.navyfcu.org, the credit union has an 11-minute video, "Get the Best Deal on Your New Vehicle," that teaches members how to deal with a car dealer and negotiate a smart deal. The website also has a link to an auto pricing guide.
"We know predatory lenders are out there, so we strive to give all our members the tools to help avoid them," Gallardy added.
When members do fall victim to predatory payday lenders and auto dealerships, Fields said that they have a three strikes rule at Pen Air.
"When a member calls and says they need help and we see a bad auto loan on their credit report, we sit down with them and have them prove that they realized what they got into and will work to get out of the spiral. It's like an addiction, unfortunately," he explained.
When the credit union sees that the member has two of those types of loans, it reiterates that it will hurt the member's security clearance and chances of being promoted.
"Some members get mad that we can't bail them out every time, but after three times we have to say, 'That's it.'"
The issue of predatory auto dealerships targeting military members is not just a recent one. In 2004, the state regulators in Virginia took away the license of a used car dealer, Carland of Yorktown, Va., for using predatory practices to lure young buyers from military bases.
According to an article in the Newport News, Va., Daily Press the dealership was known to lure Marines from Camp Lejeune in North Carolina with the offer of free rides to the dealership. The rides were only one way and would often arrive at the dealership late at night so that the Marines would have to purchase a vehicle in order to return to the base in time to report for duty the next morning.
Fields said that having the Navy jump in and take action against these types of practices has helped make it easier to educate members of the military.
"We're passionate about our role and our mission to help those folks while they are here on base. If we can save one from a payday loan or a buy here, pay here auto loan then we've done our job," Fields said.