Bankruptcy

Financial Reform Leaves Loopholes for Predatory Lenders

By Chris Kramer

Despite sweeping financial reforms passed by Congress a few weeks ago, there remain loopholes in the new laws that spell continued danger for consumers. Specifically, the new laws still allow some predatory lenders to roam free.

While the reforms put lending restrictions on most major financial institutions, car dealers and community banks escaped the grasp of the new federal regulations. This oversight poses a serious threat to many consumers, as these two industries are annually involved in billions of dollars in loans to tens of millions of people.

Car Dealers

Most folks don?t pay for automobiles with cash. As a result, auto dealers are seasoned veterans of the loan industry. With high stakes in the financial reform package, sources indicate that the auto industry lobbied hard to escape the regulations. Some of their key gains include:

• We Didn?t Do it: One of the most criticized loopholes of the financial reform bill was the ?carve out? won by auto dealers. Car dealers escaped further regulation because they convinced legislators that they were not responsible for the recent economic meltdown.
• Power in Numbers: How do car dealers have so much lobbying muscle? Mostly because there are more than 18,000 dealers nationwide. And the financial institutions who aid in most car loans were glad to assist their friends in the car industry, as well.
• More Escapees: In addition to the exemption for car dealers, companies who sell boats, motorcycles, and RVs are also not governed by the new legislation.

Finally, while 90 percent of car loans are financed through standard financial institutions, like banks, car dealers serve as brokers about 80 percent of the time. So, according to consumer groups, the car dealer?s role as a broker leaves room for them to push loans with unfairly high interest rates. According to some reports, car dealers are more likely to charge excessively high interest rates to minorities and lower-income borrowers.

Community Banks

In order to avoid further regulation, community banks successfully argued that they are much different entities than larger financial institutions. Typically, small community banks charge smaller fees than their larger counterparts and are more dependent on aid of small, local businesses.

As a result of lobbying efforts, community banks are now exempt from paying the same Federal Deposit Insurance premiums as large banks. In addition, all banks with assets under $10 billion are not required to follow new lending regulations.

Still, the Independent Community Banks of America recognize the potential for loan scams, and they warn that consumers should always be wary of loans that sound too good to be true. If you are unsure of whether or not you?re the victim of a financial scam, don?t hesitate to contact a bankruptcy attorney.

Full post as published by The Bankruptcy Blog on August 03, 2010 (boomark / email).