The Center for Responsible Lending is lobbying for greater federal and state government oversight of dealer-arranged car loans.
The nonprofit group has attacked the most common way dealerships profit from auto financing: marking up the interest rate.
In December, Staff Reporter Donna Harris spoke with Chris Kukla, the center's senior lawyer.
Q: Why do you object to dealers marking up the interest rate on car loans?
A: Our position is the same that we had with mortgage loans. We had real concerns about abuse in the system. The incentive isn't to find the best loan for the consumer -- it's to find the loan that pays the highest commission.
That way of providing compensation and putting a loan together is also very opaque.
When compensation is built into the rate, the buyer has no idea what portion is being paid to the dealer. There's no way for people to know whether they are overpaying.
Some dealers think you want to eliminate their finance profit.
I'm not saying dealers shouldn't get compensated. They just shouldn't be paid through the interest rate.
How should dealers be compensated?
I think a flat fee would work. We need a system that's transparent. The dealer should say this is what you are going to pay and this is how much the loan costs.
Dealers and lenders already have voluntary disclosures in place.
Voluntary standards are great when people use them. Right now we are in tough economic times. People tend to dial back their lending. We're concerned about what will happen when things start to go gangbusters. Then standards start to relax.
You've said flat fees are good for dealers and consumers.
It takes the risk out for the dealer. Now you don't have a finance and insurance manager who has this incentive to push the edges. With a markup there's going to be more pressure to press profit per deal.
And if the buyer goes into default early the dealers are not guaranteed that markup.
So you think dealers would be receptive to flat fees?
Things aren't easy for anyone in financial services. If there was a time to talk about changes going forward, now is the time.