CASE IN POINT: In April 2008, Raenitra Mackingtee, then a 19-year-old enlistee at the Norfolk naval station, wanted to trade in her 2006 PT Cruiser for something with better mileage. She visited Diamond Motorcars, a Virginia Beach dealer, and settled on a 2002 Honda Civic priced at $15,000. But Mackingtee still owed more than $19,000 on the Cruiser. No problem, the salesman said. He'd pay off her loan, credit her $10,000 for the trade-in, and get her a bigger loan to cover the balance on the Cruiser loan plus the price of the Honda. After taxes, fees, and add-ons, the grand total came to nearly $27,000.
The salesman had her log in to her account at the Navy Federal Credit Union—which, despite its name, is a private company. Then, Mackingtee says, she let him fill out an online loan application on her behalf.
The credit union approved her loan at 12.25 percent interest, but when she picked up the loan check, something was wrong. The promissory note listed a 2006 Dodge Charger. "I was like, I didn't get no Dodge," Mackingtee told me later. When she phoned the dealer to see how this phantom car had ended up on her loan application, the salesman obfuscated. He insisted she bring in the check anyway, because they'd already sold her trade-in. If she didn't buy the Honda, she'd have no way to get to work on the base. So she did.
A few months later, the credit union sent Mackingtee a letter seeking the Charger's title as collateral. She couldn't produce it, of course, so the bank jacked up her rate to 18 percent. This raised her monthly payments from $515 to $600—not insignificant for someone making $1,680 (plus a housing allowance) before taxes. Desperate, she contacted Alexander at Navy Legal Services, who explained that no bank would make a $27,000 loan for a Honda with a blue-book value of $9,800. The salesman knew she wouldn't qualify, Alexander believes, which is why he listed a $25,000 Dodge on the loan application.
While Mackingtee's problem might seem clear-cut, the dealer has refused to make things right. Alexander hasn't been able to help much, either; since she allegedly let the salesman use her account, it's her word against his. Diamond's sales manager insists his staff did nothing wrong. "If anyone's lying, she is," he says. The credit union, meanwhile, won't budge on the interest rate—if Mackingtee, who recently gave birth to her first child, defaults, the lender can simply garnish her wages. And though she notified the Virginia Beach police of the incident, nothing has come of it. (A spokeswoman from the credit union wouldn't discuss individual cases, but said that bank officials were aware of some of the problems with car dealers and were working with law enforcement to investigate.)
Military lawyers and consumer advocates seeking a broader strategy to rein in predatory dealers may find a useful lesson in the saga of Charlie Falk. At one time, he owned 14 used car lots, making him Virginia's largest dealer. Sure, he got sued a lot, but that never made a dent in his empire, so long as big lenders like GE Capital and, later, Finova Capital were watching his back. Not until 2002—when Falk defaulted on a large loan and Finova began cutting him off—did his business holdings shrink significantly.
A radical regulatory solution would be to ban used car dealers from selling loans altogether. Politically, though, that's a nonstarter. A more moderate fix might involve, say, capping loans at 100 percent of a car's value (plus title and tags) and limiting the spread by which dealers can jack up interest rates. Legislators could also make it easier for consumers to sue the Wall Street banks that bundle these loans.
None of these proposals is on the horizon, though. The lone recent victory for car buyers has been a watered-down California law to cap the dealer interest-rate markup at 2.5 percent for car loans with terms of up to five years.
The military has successfully battled entrenched business interests before. Payday lenders charging usurious rates used to be as much a part of the base landscape as ethically challenged car dealers. (In fact, many of their clients were short on cash because they bought a lemon that broke down.) But nothing changed until 2007, when Congress—publicly shamed by the brass—put a 36 percent cap on the interest rate lenders could charge soldiers and their families, thereby driving many of the worst payday operators out of the military market.
The recent credit crunch has in some ways done the job that regulators have neglected. Across the country, some of the largest used car dealers, often those with the worst consumer records, have gone under as banks stopped lending. But that doesn't make service members less vulnerable: Military credit unions are still handing out loans to the troops with few questions asked. In fact, as one salesman at Diamond Motorcars, the dealer that allegedly caused Mackingtee so much grief, put it, military personnel are just about the only people who can get car loans nowadays.
Additional reporting by Taylor Wiles.