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More FTC and less Dodd-Frank for the auto lending industry

This article was originally published on April 30, 2015 inThe Hill.

Sen. Elizabeth Warren (D-Mass.) recently announced that she wants the Consumer Financial Protection Bureau (CFPB) to apply the Dodd-Frank Act to automotive dealers, who are issuing higher numbers of subprime loans in recent years for higher credit risk consumers. Although Warren’s intentions to reign in the subprime vehicle market before it affects our slowly recovering economy, the unintended consequences could be as bad – or worse – than the current lending climate.

Warren wants to put non-bank automotive dealers under the oversight of the CFPB. The industry avoided this provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 with a specific amendment from then-Sen. Sam Brownback (R-Kan.) that reprieved auto dealers from the new regulatory framework.

On the face of it, giving the CFPB oversight may seem like a good idea. A 2014 New York Times article outlined the misery that predatory lending practices were creating among the nation’s poor. Exorbitant interest rates, and pressuring buyers to accept loans they could not afford to repay, sounded much like stories told during the housing bubble’s subprime bonanza. It’s a strong message to carry for politicians looking to draw on populist sentiments, but it also assumes both a consumer and lender that are either not self-interested or not capable of recognizing decisions that are not in their own self-interest. I don’t buy either premise.

The auto-lending industry is not the same as the mortgage industry. Our country already has a world of regulations governing both. It is less likely that subprime loans will tank the U.S. economy, since they represent a smaller fraction of the lending market. The industry already has oversight through the Federal Trade Commission (FTC), which the Times article said was actively prosecuting auto lenders for deceptive and illegal lending practices.

Using Dodd-Frank to oversee this small industry could create a variety of unintended consequences. Most likely and damaging would be stopping those consumers with worse credit from obtaining auto financing and obtaining an automobile and the freedom that comes with it. For the working poor, the ability to drive can mean the difference between keeping and losing a job.

Unfortunately, those who would wish to implement this policy believe that the supply of automotive lending drives demand for automobiles. While this may be the case to a small degree, one should never assume that denying someone the ability to buy a car somehow stops that person from needing a car.

This regulation could also drive some smaller auto dealers out of business. Burdensome reporting requirements and unpredictable unintended consequences will almost certainly also occur.

We saw these unintended consequences crop up after Dodd-Frank was imposed on the mortgage industry. Smaller mortgage lenders went out of business or were gobbled up by larger corporations. Community banks and credit unions are getting squeezed out of many markets. Even the decline of free checking accounts can be linked to the 2010 act.

There is no doubt that bad actors in the auto-loan industry need to be policed. But instead of putting the industry under the regulation of CFPB, the FTC needs to be held accountable for their job of holding auto-lenders accountable and enforcing existing statutes governing lending. The FTC has the teeth, financial ability and mandate to prosecute dealers who cheat their customers. When the FTC does its job, the vast regulatory framework already governing auto lending will do its job, too.

The FTC doing its job will help avoid many of the unintended consequences of Dodd-Frank on the auto-lending industry. Although Warren’s intention to protect the public and the economy from another subprime mess may be honorable, it is misguided and may be a case of the cure being worse than the disease.