The debate over the Senate's financial reform bill is setting up an unusual battle on Capitol Hill between two powerful groups: automobile dealers and the military.
Car dealers, a well-organized small-business lobby with members in nearly every legislative district, have swarmed the Senate in recent weeks clamoring to be exempt from the legislation's proposed protections against loan scams.
They say the tough new government oversight should focus on the big Wall Street firms that caused the financial crisis, not auto dealers struggling to recover from it.
"There's a lot of dealers that are still on the brink, and taking their finance revenue away from them could be the straw that breaks the camel's back," said John Symes, who owns three auto dealerships in Pasadena.
But in a letter released Thursday, a top Pentagon official said soldiers need to be protected from "unprincipled auto lending" so they can concentrate on their primary mission: "protecting our great nation."
"Soldiers who are distracted by financial issues at home are not fully focused on fighting the enemy, thereby decreasing mission readiness," Army Secretary John M. McHugh wrote Wednesday to Senate Banking Committee Chairman Christopher Dodd (D-Conn.).
Top Pentagon officials don't usually weigh in on non-military legislation. But they have complained that shady car loans have been particularly harmful to military personnel — often young, inexperienced consumers who have other worries when they walk into car lots near military bases.
For military and civilian families, the battle could have major consequences on the terms of car loans, which often are the largest debt they hold after home mortgages.
The lobbying by the Pentagon, along with strong opposition to the exemption by President Obama, highlighted the contentious fight over the proposed consumer financial protection agency, a central and controversial component of the sweeping financial regulatory overhaul legislation.
"We simply cannot let lobbyist-inspired loopholes and special carve-outs weaken real reform that will empower American families," Obama said this week.
Standing up for consumers and members of the armed forces would seem to be a no-brainer for senators. But auto dealers are a popular home-state constituency — well-known small-business owners in many communities who sponsor Little League teams and employ constituents.
Sen. Sam Brownback (R-Kan.) has taken up their cause. He wants to amend the legislation to exempt auto dealers from the consumer agency's oversight if they are acting only as third parties in arranging financing for consumers through banks or credit unions.
"Auto dealers are a part of Main Street, not Wall Street, and they are not responsible for the financial meltdown," Brownback said.
Most dealers are simply intermediaries in auto financing and don't want to be subject to burdensome new regulatory oversight, said Bailey Wood, a spokesman for the National Automobile Dealers Assn.
Terms of all auto loans would be covered by the new consumer agency regardless, because most loans are made by banks and credit unions that would be under its oversight. The proposed exemption makes it clear that auto dealers that provide direct financing, as some do, also would be covered.
"We're just in the middle, facilitating the loan," said Symes.
At his dealerships — Symes Cadillac Saab, Toyota Pasadena and Land Rover Pasadena — oversight by the new agency would mean more forms to fill out and additional training for employees.
"Like with all government regulation, the price to the consumer is going to go up," he said.
With bipartisan support, the House included a similar exemption in its version of the financial regulatory overhaul last year. But that was before the military began weighing in.
In a February letter supporting the stricter car dealer oversight, Undersecretary of Defense Clifford L. Stanley said that 72% of the Pentagon's financial counselors reported helping service members with problem car loans.
Surveys of service members found that financial matters are the second-leading source of stress — even more than concerns about deployments — and that car loans represented the most significant financial responsibility of most young recruits, Stanley said.
Sen. Jack Reed (D-R.I.) told senators this week about Army Spc. Jennifer Howard of Fort Riley, Kan., who was charged for a moon roof and alloy wheels on her car that she never got.
"The dealership knows that we're busy, we're tired. We don't take the time, because we don't have a lot of time," Reed quoted her as saying in support of more consumer protections. "That is no way to treat soldiers. It is no way to treat consumers."
The cause has been taken up by Holly Petraeus, the wife of Gen. David Petraeus, head of the U.S. Central Command. She has been working with a special program of the Better Business Bureau to establish stricter consumer protections for military families.
"It's a fact that military personnel love their cars," Holly Petraeus said in a conference call with reporters this week. "Sadly, many of them end up paying far more for them than they should."
Consumer advocates also oppose the auto dealer exemption.
Rosemary Shahan, president of Consumers for Auto Reliability and Safety, a Sacramento nonprofit advocacy group, said auto dealers pack financing contracts with costly items such as extended warranties and insurance to cover loan payments if the vehicle is wrecked.
"Even very sophisticated consumers get ripped off," she said.
According to the Better Business Bureau, new car dealers ranked fifth in complaints in 2009, and used car dealers ranked seventh.
"Why should we exempt from scrutiny the very businesses that generate the most problems?" Sen. Dick Durbin (D-Ill.) said.