Reform: Dealers Lobby Congress for Exemption

More than 100 franchise dealers from across the country went to Washington D.C. late last month to lobby their elected officials for exclusion from the U.S. Senate version of the sweeping financial reform bill working its way through Congress.

Earlier the National Automobile Dealers Association had successfully lobbied for exclusion from a U.S. House of Representatives version, which would create a new Consumer Protection Finance Agency to oversee all consumer-related financing from automobile financing to dentists who extend credit to consumers for false teeth and crowns.

Bailey Wood, a spokesperson for NADA governmental affairs group, said while lobbyists were able to convince the House Financial Services Committee to exclude franchise dealers as providers of indirect lending, they weren’t able to get the exclusion on the Senate side, though they have found a friend in Sen. Sam Brownback, R-Kan., who has offered and predicted Senate passage of his amendment to exempt dealer-assisted financing from oversight by a proposed consumer-protection agency.

Wood said that at no time during lobbying efforts were independent dealers who provide indirect or direct financial services ever included in the amendment or discussions.

During the interim, President Barack Obama said he would veto any legislation that would exclude automobile dealers from oversight by the so-called CFPA.

Wood said the proposed consumer protection agency would have very far-reaching authority over financial transactions, instruments and the regulations that government them.

“If all dealers are included in this legislation this new agency would have unfettered authority to regulate all aspects of dealer-assisted financing,” he said. “This agency could determine what a sales commission should be, limit a dealer’s ability for reasonable compensation and prevent people below a certain income level for getting financed. The would have the regulatory authority equivalent to the EPA.”

He said there would be numerous unintended consequences when from this legislation if passed in either of its current forms, not the least of which would be increases in the cost of credit and imits on the accessibility of credit.

Keith Whann, general counsel for the National Independent Automobile Dealers Association, was in Washington D.C. last month to discuss the various nuances of the proposed legislation with various congressional staff members who are helping to prepare the legislation.

Whann, who has spent many days with legislators and staff over the years discussing automotive laws and regulations on such issues as odometer tampering legislation, the Anti-Theft Act and other financial reform, said the sweeping nature of the proposed law and its regulatory body is in a word—scary.

For instance, Whann said there was a great deal of input from military leaders concerned over the buy here-pay here and other dealers near military bases catering to soldiers and sailors. Whann was quick to point out there concerns dealt exclusively with sales issues, and not with financial regulation and would not be covered under the bill.

He said that the recent furor and complicated nature of the health care reform legislation will look like child’s play compared to what will occur in the automotive retail industry if this legislation passes in either of its two current forms.

Whann said that first off many of the laws and regulations government automotive retail installment transactions occur at the state level and that any attempt by the federal government to supercede the state laws may be un-Constitutional and will likely end up in the courts regardless of which direction the legislation takes.

That being said, Whann noted the automotive retail industry is one of the most heavily legislated and regulated industries in the U.S. Often overlooked is the fact that motor vehicle dealerships have to be licensed, can only sell vehicles at a licensed location and can only use licensed salespeople. To complicate matters even more, there are a whole host of state and federal laws that impact a motor vehicle sales transaction, including State Unfair and Deceptive Acts and Practices (UDAP) Statutes, State Motor Vehicle, Titling and Retail Installment Sales Acts, the Uniform Commercial Code, the Magnuson Moss Warranty Act, the Fair Credit Reporting Act, the Truth in Lending and Leasing Acts, the FTC Used Car Rule and the new Federal Privacy and Anti-Terrorism Laws and their implementing regulations, to name a few.

Whann notes that not only do these laws often overlap, but also regulators and the courts are continually modifying interpretations of these laws. Putting all of this together, achieving compliance for a motor vehicle dealership can be extremely difficult and keeping current with legal, regulatory and legislative developments can be extremely challenging.

He said the financial reform measures under consideration simply aren’t taking these existing statutes and regulations into account, and seemed to come as education to many of the legislative staffers.

What concerns Whann is that if this legislation were passed, much of the overlap and gaps between the new federal and existing state laws would get clarified by the new government regulatory agency and that could mean huge problems for both dealers and consumers.

“When you have a committee figure out the rules later you run into real problems,” Whann said. “This is complicated legal stuff. Dealers must follow strict rules in the sales and financing of news and used vehicles and provide the proper paperwork to support the adherence to these rules already.”

Many within the government, said Whann, feel that buy here-pay here dealers take advantage of consumers by charging the maximum interest rate allowed by state law. While in many cases, that is true, often it’s not as dealers must adjust to competitive issues in their marketplace as well as consumer demand.

“Many are opposed to risk-based financing all together,” Whann said. “The best thing they could do with this legislation, is to eliminate the unfair tax on buy here-pay here dealers who pay the tax on their profit from the sale of a vehicle before they collect the payments. If dealers did not have to pay this tax up-front they could pass along the savings to their customers.”

A quick Internet search on the topic turns up numerous articles and blogs, which paint a picture of car dealers as unscrupulous, underhanded and deceitful in their dealings with consumers. This myth is continually perpetuated by the likes of mainstream network news, Edmunds.com, Yahoo!Autos and others.

As has been reported in Dealer Business Journal, in 2009 the Better Business Bureau logged 55,000 consumer complaints against dealers and automotive repair centers (that includes both vehicular repair problem and financing issues). Given that there were some 41 million new and used vehicle sold in the U.S. last year, that means a complaint rate of .00134 percent, just 1.34 complaints per every 1,000 vehicles sold. Automotive-related complaints didn’t even make it to the Top 10 Complaint List by the FTC in 2008. They were No. 16 with just 14,275 complaints.

Still, you get major players like Consumers Union, publisher of Consumer Reports and Consumer Reports Money Adviser, that issued a statement recently that “Auto dealers that market auto loans to customers should be subject to the same restrictions on predatory lending proposed for banking institutions.” It recently sent letters to Senators Christopher Dodd (D-Conn.) and Richard Shelby (R-Ala.), outlining how auto dealers use bait-and-switch tactics and other techniques that end up costing borrowers more than necessary on their auto loans.

The letter, in part, reads, “Auto sales and service complaints, typically related to predatory lending practices at dealerships, rank No. 1 among consumer complaints lodged with state and local consumer protection agencies. Since motor vehicles are the second-largest purchase most consumers make, and the average price of a new car is now more than $28,000, relatively few car buyers can afford to pay cash, leaving most consumers vulnerable to predatory auto lending. Young people purchasing their first cars, racial and ethnic minorities, and members of the Armed Forces are particularly vulnerable.”

Consumers Union lists a survey by Consumer Federation of America, which does list “Auto” at it’s No. 1 complaint category, but not solely related to financing, and includes automotive repairs and towing. Auto: Misrepresentations in advertising or sales of new and used cars,lemons, faulty repairs, leasing and towing disputes.

Obviously, given that there are more than 250 million vehicles on the road in the U.S., it would only be common sense that when combining sales, repairs, lemon law issues, leasing and towing that there would be more complaints than other industries only because of sheer volume. When you look at the percentage of complaints in terms of the total, as mentioned with the Better Business Bureau and the FTC earlier, automotive retail transactions and financing make up a tiny percentage of overall consumer complaints.

Still the drumbeat against automotive retailers is beating loudly across the country.

Americans for Financial Reform is urging Congress not to exempt any special interests, including financing from car dealers. It recently sent a letter to Congressman and Senators in the various committees considering the legislation.

Americans for Financial Reform and the Consumer Federation of America joined with consumers to detail the deceptive practices auto dealers use to scam buyers by jacking up the cost of their loans and the need for these dealers to be included in the Consumer Financial Protection Agency.

Susan Weinstock, director, Financial Reform Campaign, Consumer Federation of America said, “We are very supportive of the Consumer Financial Protection Agency because its sole mission will be the oversight of financial products and services – things like credit cards, overdrafts, the terrible stories we’ve heard today about car financings. And it’s going to cover unchecked lending abuses that have been a problem for consumers for many years.”

Rosemary Shahan, president, Consumers for Auto Reliability and Safety said, “A majority of car dealers’ profits are derived not from the sales of their cars, but from the finance and insurance departments which are much less transparent…Dealers have engaged in numerous practices to maximize their profits including charging excessive dealer markups. These are akin to the fees that brokers get for raising interest on home loans. It’s not as regulated. It’s not as transparent even as that transaction.”

Still as recently as April 27, Sen. Brownback, predicted Senate passage of an amendment he was filing to exempt dealer-assisted financing from oversight by a proposed consumer-protection agency.

“I think we will be successful in the Senate,” Brownback said at a news conference to in Washington, despite opposition by the Obama administration, consumer groups and the Pentagon. Brownback declined to predict how many votes he could get or how many co-sponsors he could attract.

Brownback spoke as more than 100 dealers from 40 states were meeting with their senators to lobby for the amendment.

The National Automobile Dealers Association spent tens of thousands of dollars to fly in dealers in and pay for their lodging, said NADA chairman Ed Tonkin.

Sen. Shelby said he felt the sweeping reforms would give the government too much power.

“This massive new bureaucracy would have unchecked authority to regulate whatever it wants, whenever it wants, however it wants,” said Shelby, the ranking member of the Senate Banking Committee. “I am aware of no other arm of the federal government this powerful, yet so unaccountable,” he said, adding that he could not support the bill in its current form.”

NADA’s legislative office is asking dealers to make appointments with their Senators to discuss this issue, or call their Senators at (202) 225-3121 and urge them to support the Brownback auto dealer amendment to the financial reform bill.