Auto dealers maneuver for exemption in financial reform bill

Introduction

In Arizona, Hector Maldonado says he ran into trouble with his bosses because he objected to what he claims was his employer’s habit of faking financial information to qualify customers for loans they couldn’t afford. One manager, Maldonado alleged in a lawsuit, cursed and threatened him after he came forward with information documenting dishonest lending practices.

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In Michigan, Matthew Manley claims his coworkers saddled customers with bigger loans by slipping unapproved charges into the deals. One manager, Manley alleges in his own lawsuit, urged him to target vulnerable customers — referring to the elderly as “people with oxygen tanks” and African Americans as “the dumb blacks.”

In the wake of the nation’s mortgage meltdown, Maldonado and Manley’s allegations sound familiar. But the pair weren’t employed in the subprime mortgage business. They worked for car dealers.

They are among 20 former auto dealership insiders from Arizona, California, Florida, Michigan, Illinois and Hawaii who describe a culture in which forged documents, hidden fees and other questionable practices were tools of the trade. These accounts, provided in court records and in interviews with the Center for Public Integrity, paint an unflattering portrait of the on-the-ground realities of auto financing.

The abuses alleged by the former insiders mirror some of the tactics that gave the mortgage industry a bad name and prompted consumer advocates and lawmakers to push for the creation of a federal consumer financial protection agency. Now, as Senate and House negotiators try to come to agreement on the final shape of a sweeping financial reform bill, car dealers and their critics are clashing over whether the dealers should be excused from oversight by the consumer-protection bureau.

Congressional negotiators are expected to take up the auto dealer carve-out issue on Tuesday.

Car dealers arrange the financing for what for many Americans is their largest or second-largest financial obligation. Consumer activists say that the industry, which is increasingly led by an array of Wall Street-traded “megadealer” chains, shouldn’t be given a free pass from stepped-up federal oversight. (See accompanying sidebar.)

Auto dealers and their defenders say that abuses in the industry are rare. They note that they’re already overseen by a myriad of state agencies as well as the Federal Trade Commission, and say that it would be unfair to force them to operate under yet another layer of regulation.

Charles Cyrill, spokesman for the National Automobile Dealers Association, said in a written statement to the Center that comparing auto financing practices to the practices that led to the mortgage meltdown is an exercise in myth-making. “Auto loans are sound, based on due diligence, and do not pose systemic risk,” he said. “Unlike mortgages, auto finance did not experience a subprime lending crisis and does not pose a systemic risk to the nation’s financial system. No one is talking about an ‘auto bubble.’”

Dealers exercise their political might

The battle over whether to exempt car dealers from the increased federal regulation has been a contentious one, marked by a multi-million-dollar lobbying blitz and, according to news reports, at least one congressional ethics inquiry.

During 2009 and the first quarter of 2010, the National Automobile Dealers Association and the American International Automobile Dealers Association spent almost $3.5 million to lobby on financial reform and other issues, according to congressional disclosure documents examined by the Center. NADA represents more than 17,000 dealers; AIADA represents some 10,000 foreign-car franchises.

California Republican Rep. John Campbell, a former auto dealer, was the main force behind the auto dealer exemption from oversight by the proposed consumer agency in the bill that passed the House. “He was trying to support his buddies,” said Lauren Weiner, a spokeswoman for Americans for Financial Reform, a coalition advocating for strict financial industry regulation. Since 2005, auto dealers have donated $112,000 to Campbell’s political campaigns, according to the Center for Responsive Politics. Campbell’s office did not immediately respond to calls for comment.

In the Senate, Sam Brownback, a Kansas Republican, failed in his effort to push through an amendment to carve out dealers from oversight, but won a nonbinding resolution urging Senate negotiators to fight for the exclusion when they meet with House members to finalize reform legislation. Since 1998, auto dealers have donated more than $50,000 to Brownback’s campaigns.

The Hill has reported that the Office of Congressional Ethics is looking into the actions of Rep. Melvin Watt, a North Carolina Democrat, in connection with the jockeying over financial reform’s impact on car dealers. The newspaper reported that Watt offered an amendment that would have narrowed car dealers’ exemption from oversight by the consumer finance protection agency, but then pulled it on Dec. 11, two days after a group of corporate players — including companies involved in auto financing — held a fundraiser for him. Watt said in a statement that he was confident the inquiry would find “no violation of either the letter or the spirit of any laws or ethical standards.” The Office of Congressional Ethics declined to comment.

Auto financing generates profits

Car dealers are concerned about the legislative scuffling in Washington because financing is a crucial profit center for them. New car dealers often make modest margins on the sale of vehicles, but earn substantial sums by arranging financing for car buyers. So-called “after-market” income from financing, insurance and service contracts produced roughly 60 percent of dealer profits from selling new cars in 2008, according to research by Raj Date of the Cambridge Winter Center for Financial Institutions Policy. Former auto dealership workers who have spoken out in lawsuits and interviews say that the push to pump up profits from financing and add-ons leaves consumers vulnerable to a variety of questionable practices.

The former dealership employee in Michigan, Matthew Manley, worked as a sales manager at Patsy Lou Buick-GMC-Chevrolet, a collection of dealerships in the Flint area that are among the family business holdings of that city’s former mayor and first lady, Donald and Patsy Lou Williamson. On its website, the dealership notes that it has “consistently ranked among the highest in the nation for sales and customer satisfaction.” Manley’s lawsuit in Genesee County Circuit Court claims that the dealership demoted him and forced him out of his job after he reported the fraud to a law-enforcement agency.

Frederic Champnella, an attorney who represents the dealership in the case, said Manley’s allegations of hidden fees being packed into customers’ loans have no basis in fact. “He has no evidence of this scam being pulled on people,” Champnella said. “Everything the person bought, he or she signed for it.” As for Manley’s claim that a manager used slurs in referring to the elderly and African Americans, Champnella said, “It’s just not true.”

The former Arizona dealership staffer, Hector Maldonado, worked in the auto financing department of Brown and Brown Chevrolet in Mesa, one of the 200-plus dealerships in the nation’s largest auto megadealer, AutoNation Inc. His lawsuit in Maricopa County Superior Court claimed that a supervisor told other workers to “stay away” from him because he was “a liability.” Maldonado’s attorney, Bill Hobson, said his client recently decided to withdraw the lawsuit and pursue his complaint through the Arizona attorney general’s office, because he believes that’s the best way to ensure that something is done to stop the practices he’s concerned about.

In court papers, the company denies the allegations. Marc Cannon, an AutoNation spokesman, said he couldn’t comment directly on Maldonado’s claims, but said Maldonado’s decision to drop his lawsuit “gives you some insight” into the validity of his allegations. Cannon added that the company takes complaints from customers or employees “very seriously,” often bringing in third parties to investigate their concerns.

Since its founding in the mid-1990s by H. Wayne Huizenga, the empire builder behind Blockbuster and Waste Management, Inc., AutoNation has sold more than 7 million vehicles. It reported almost $10.8 billion in revenues in 2009.

In addition to fighting lawsuits from customers and former employees in several states in recent years, the Fort Lauderdale-headquartered chain has also run afoul of government authorities in California. In 2001, AutoNation agreed to pay more than $2 million to settle a Los Angeles District Attorney’s Office investigation and a California Department of Motor Vehicles lawsuit accusing its El Monte, Calif., Chevrolet outpost of subjecting more than 1,500 customers to what the DMV described as “fraud, deceit and misrepresentation” in the sale and leasing of new and used vehicles.

In March, another AutoNation dealership, Power Toyota Cerritos, agreed to pay as much as $500,000 to settle an investigation by the California Department of Motor Vehicles. The DMV alleged that the dealership misled customers about whether they qualified for auto loans and steered them into leases by falsely telling them that their lease payments would apply toward the purchase of their vehicles.

Cannon, the AutoNation spokesman, said Power Toyota Cerritos customers were not tricked into leases; they agreed to the transactions in writing. “We didn’t forge those signatures,” he said. “We didn’t make it up.” He said the company settled the case because it wanted to put the matter behind and “get on with life.”

Cannon said one of the auto industry’s problems is “sue-happy” attorneys who play on the myth “that car dealers are always out to screw people and the dealer is the bad guy.”

In contrast to that image, he said, AutoNation works hard to make sure that customers understand what they’re getting. “We’ve been a leader in full disclosure,” he said. “Our customer satisfaction is over 90 percent. It wouldn’t be that high if we weren’t doing something right.”

A bit of razzle-dazzle

In addition to California, Florida has also been host to a large volume of litigation against auto dealerships.

In Palm Beach County, five former employees of Belle Glade Chevrolet claim they were fired after they refused to participate in illegal activities at the dealership. Their lawsuit in the local Circuit Court alleges that the dealership took money for repair warranties and insurance but never purchased the add-ons for the customers. In addition, the suit claims that Belle Glade Chevy’s owner used razzle-dazzle to fool banks that provided financing for the dealership into thinking it had more inventory than it really did — shuffling cars back and forth from one affiliated sales lot to another, so that some vehicles got counted more than once.

The ex-employees’ attorney, Michael Stauder, said a judge has ordered the case into arbitration, based on standard employment contracts that require that disputes be heard by an arbitrator. The dealership’s management did not return calls seeking comment on the case. On its website, the dealership’s ownership group says it goes to great lengths to ensure that customers aren’t subjected to “high pressure” salesmanship and know what they’re getting: “Our prices are clearly marked on the windshield for you to see, not on a sheet of paper in the sales person’s back pocket.”

Among the Florida car lots that have faced allegations of fraud are a chain of dealerships controlled by U.S. Rep. Vernon Buchanan, a Florida Republican that OpenSecrets.org ranks as one of the wealthiest members of Congress.

Timothy Thornton, a former finance and insurance manager at Buchanan Automotive’s Suncoast Ford, claims in a lawsuit that the dealership’s sales desk “frequently and systematically” falsified the income on customers’ credit applications, creating fake W-2 and 1040 tax forms. The suit claims customers were usually unaware of these and other falsifications because dealership employees forged loan applicants’ signatures on contracts, credit applications and other documents.

Joe David Kezer, a former finance director at Buchanan Automotive’s Sarasota Ford, alleges that the dealership used false information to qualify “customers who were less than credit-worthy” and “power booked” used cars, “listing options and equipment that were not in fact on the car for the purpose of increasing the loan value.” Kezer’s lawsuit, filed in Sarasota County Circuit Court, says some lenders were aware of the fraudulent applications, but approved them anyway because the dealership provided them up-front payments ranging from $95 to $4,000 per deal. These bank fees were not disclosed to customers, Kezer alleges.

Douglas Lyons, a consumer attorney who represents Kezer and other former Buchanan Automotive employees, said a judge has ordered Kezer’s case into arbitration, and Thornton’s case is still pending in Pasco County Circuit Court.

Spokespeople for Buchanan’s company and his congressional office could not be reached for comment. When Kezer’s case was filed in 2008, a top official with Buchanan Automotive called his claim that the dealer doctored official paperwork “a very false statement.” In court filings, Buchanan’s attorney has said that a flurry of lawsuits targeted at Buchanan’s dealerships were part of a smear campaign against Buchanan. In response to Thornton’s lawsuit, a spokesman told the Sarasota Herald-Tribune that “Vern is busy being a congressman, and this is a corporate matter,” adding that Thornton’s case was “just another in a series of politically-timed lawsuits.”

Staff writer Joe Eaton contributed to this article.