‘Main Street’ wins exemption

WASHINGTON – The financial overhaul bill awaiting final action in the Senate includes a new regulator whose aim is to make sure mortgages, credit cards and other products from big banks don’t abuse or confuse you.

But if you want your auto dealer to arrange a car loan or get a community bank to extend you a credit line, be sure to read the fine print.

Thanks to their lobbying muscle in Washington, auto dealers and community banks managed to keep themselves outside the reach of the new Consumer Financial Protection Bureau.

Consumer advocates say borrowers will remain vulnerable to the kind of unscrupulous peddling of financial services products that led to the financial crisis.

“You’re going to end up with regulatory gaps that can hurt consumers,” said Travis Plunkett, legislative director of the Consumer Federation of America.

The influence of auto dealers and community banks derives from the strength of their small-town roots. They are people who serve as Rotary Club officers and sponsors of Little League teams. Dealers arrange most loans for auto buyers. Community banks account for more than 98 percent of U.S. banks.

The consumer bureau will write and enforce rules for financial services and products. It can ban confusing fine print on bank loan documents – but none of the other paperwork car buyers must complete. And it can punish banks for offering deceptive loans – unless they’re community banks.

Auto dealers, including those that sell boats, motorcycles and RVs, won a blanket exemption from the new consumer protection bureau.

Community banks scored a smaller but still crucial victory: They’re supposed to follow the bureau’s rules. But the bureau can’t force them to.

That duty rests with existing federal bank agencies and state authorities. Those same agencies failed to crack down on many of the abuses that led to the 2008 crisis. That’s a big reason why a new financial protection bureau was deemed necessary.

The exemptions for auto dealers and community banks – defined as those with less than $10 billion in assets – reflect their vast influence in Washington. They succeeded even as lobbying by the nation’s banking giants failed to protect those companies from the new bureau’s strictest oversight.

The National Automobile Dealers Association began barraging congressional offices with phone calls and e-mails as early as last fall. They noted that dealers merely arrange most auto loans, linking customers with lenders, and are already subject to regulations on auto financing. The lenders – including the auto finance arms of automakers like Ford and Toyota – will fall under the new bureau’s authority.

“This is a government overreach into private business,” said NADA chairman Ed Tonkin. “Dealers are not banks, and we shouldn’t be subject to bank rules.”

The auto dealers’ exemption ran into unexpected resistance when the Army secretary and other top Pentagon officials had urged Congress not to give dealers a pass. Reports had emerged of financially inexperienced troops being pushed into predatory car loans by dealerships near military bases.

The administration also lobbied against the exemption for auto dealers. President Barack Obama issued a rare public statement opposing it.

“An auto loan is like any other loan,” said Lauren Saunders, managing attorney of the National Consumer Law Center, which has argued cases on behalf of minority car buyers who complained that auto dealers discriminated by giving them higher-cost loans. “The auto dealers are a very powerful political lobby, and at the end of the day, that is what won.”

Dealerships nationwide number about 18,000. And nearly 8,000 community banks dot the country.

“They have that incredible grass-roots power, and that’s why they got the loopholes and the carve-outs they did,” said Ed Mierzwinski, consumer program director at U.S. Public Interest Research Group.

The auto dealers’ successful argument to Congress – don’t punish Main Street for Wall Street’s sins – was echoed by community banks. Community banks, which include thrifts and depositor-owned banks, cater to homebuyers, developers, small businesses and farmers, among others.

Yet small banks don’t necessarily mean small risks. A wave of failures has battered community banks: They account for nearly all the 226 banks in the U.S. that have failed since the start of 2009.

Local bankers are big donors in hundreds of congressional races that will be decided this fall.