A car dealer tells an Army soldier that the perfect car is sitting on a distant lot. They ride there together in a van, but the van leaves. If the soldier fails to return to base soon, he will be reported as AWOL. The soldier is stuck, so he buys the car.
This scenario plays out time and again on car lots near U.S. military bases, Holly Petraeus, chief of servicemember affairs for the new Consumer Financial Protection Bureau, said this week at a federal hearing in San Antonio. Soldiers are often targeted by car dealers because “their salary is absolutely rock-solid and it will be paid twice a month,” Petraeus said.
It was the second of two rounds of hearings conducted by the Federal Trade Commission to investigate alleged abuses by car dealers against active members of the military. The hearings were covered by the Center for Public Integrity, which first broke the scandal of car dealers ripping off soldiers in an investigative report in April.
Other common scams include tacking hidden interest rate increases onto car loans, and overcharging soldiers for options, witnesses told the FTC. In once case, a dealership hid the actual loan costs by printing two different sets of paperwork, Dwain Alexander II, an attorney with the Navy Legal Service Office, told the panel.
The dealership charged the same service member $2,700 for a GPS system worth only $200.
This week’s hearings in San Antonio, and hearings held in Detroit in April, were held by the FTC to investigate allegations that car dealers actively target soldiers for scams. Getting a loan through a dealer may give consumers the opportunity to shop for a cheaper loan from multiple lenders, the FTC said in a press release announcing the hearings.
“Dealer-arranged financing, however, can be a complicated, opaque process and could potentially involve unfair or deceptive practices,” the commission said.
A number of investigations have detailed how servicemembers are sometimes targeted by overzealous car dealers. One of the first was conducted by the Center for Public Integrity’s David Heath, who found that car dealers are secretly increasing loan interest rates and lying on loan applications about the car’s value and the buyer’s income, practices recently outlawed in the mortgage industry.
Banks often offer incentives for dealers to increase the interest rates on car loans, over and above the rates for which consumers actually qualify, according to the Center for Responsible Lending.
“In the case of interest rate markups, it adds an estimated $25.8 billion to the cost of car loans, raising the chance of default and repossession, especially among subprime borrowers,” according to a press release by the center.
At the FTC hearing in San Antonio, car dealers testified that such complaints are old news, and that the industry has changed significantly in recent years.
“To the extent there is an abuse somewhere, that’s an exception, not the norm,” Mercer said. While a few “bad players” still exist, the impression of car dealers as scammers is a holdover from “bygone years,” said Mercer.
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Image: Mr. T in DC, via Flickr.com