WASHINGTON — Heading into the final stages in overhauling financial regulations, a joint congressional committee is ready next week to tackle one of the thornier issues — whether car dealers will be regulated by a proposed consumer protection agency.
The joint conference committee is wrestling with the role dealers play in auto financing and the discretion they have to set terms — and potentially take advantage of consumers.
Dealers who assist in financing argue they're just middlemen, helping buyers secure the best loans. Abuses are rare and already covered by fraud regulations enforced by state officials and the Federal Trade Commission, the dealers said.
As savvy car buyers armed with online price data and other information have pushed for harder bargains on purchase prices, dealers have tried to boost other sources of income, such as service contracts and auto financing. In some cases, consumer advocates said, they've resorted to questionable tactics.
In need of a car, Sara J. King of Encinitas, Calif., went to Toyota Carlsbad with her parents in March to see if she could make a deal. But with poor credit, she found the best interest rate too steep at 16 percent.
As the dealer was preparing to close for the day, however, King, 26, said the finance director made her an offer she couldn't refuse: Drive home in a shiny new white Corolla for $3,500 down with 0 percent financing.
Ten days after she signed the paperwork and pocketed the keys, Toyota Carlsbad told King it couldn't find a bank to take the loan and that she'd have to agree to 16 percent financing.
Her case is an example of what the industry calls yo-yo financing: A dealer agrees to a great bargain, then pulls it back a week or two later. The goal is to get the buyer to pay more later to avoid the hassle of returning the car.
King returned the Corolla and got her down payment back.
Auto dealers are fighting back against additional oversight, which they say is unnecessary and will add to their costs, ultimately driving up prices.
"They would have you paint the whole industry as doing these devious things," said Ed Tonkin, owner of a group of dealerships in Portland, Ore., and chairman of the National Automobile Dealers Association. "We don't condone any abuses; we are totally against that."
A political force because of their numbers and community involvement, auto dealers last year successfully persuaded the House in its version of the overhaul of financial rules to exempt them from oversight by the proposed consumer protection agency.
But with opposition from the Obama administration, particularly Pentagon officials who said members of the military often complain about getting ripped off, the Senate did not include an exemption.
Consumer advocates say auto dealers are overstating their ability to help consumers get good deals from banks and need greater oversight to prevent abuses.
Most dealers don't lend money to buyers but assist in matching up buyers with banks. Those that do lend their own money, called buy-here-pay-here dealers, would not be exempted from the consumer agency's oversight under the House bill.
In the rest of the cases, consumers without their own cash or pre-arranged financing through credit unions or other lenders strike their financing bargain with the dealership. In 2007, 79 percent of auto lending was done through the dealers, according to the Cambridge Winter Center for Financial Institutions Policy, a nonpartisan think tank.