Auto dealers dodged a bullet last year when Congress exempted them from sweeping financial-reform legislation aimed at lenders.
Now, dealers fear they’re in the crosshairs for a potential new round of finance-related regulations.
In addition to their usual worries, from inventory shortages to auto maker demands for expensive facility makeovers, the dread of more government oversight is much on dealers’ minds.
That is why they are active on Capitol Hill and across the country, trying to explain to public officials and the public what roles dealers do and don’t play in auto lending. It has been a primary lobbying effort this year and will continue as one in 2012.
“It is the single most important educational effort we’re involved in,” National Automobile Dealers Assn. Chairman Stephen Wade tells the recent Finance and Insurance Management and Technology conference in Las Vegas.
NADA fears misguided or misinformed types could trigger a new set of unnecessary, cumbersome and redundant rules governing auto financing.
“We need to sound a drumbeat of education in Washington,” says Andy Koblenz, the trade group’s general counsel and vice president-legal and regulatory affairs.
It rattles NADA that some influential people show a lack of knowledge about the car industry in general and auto lending in particular.
The trade group has met public officials who mistakenly thought dealers sell cars on consignment, rather than in fact buy them wholesale from auto makers before selling them at retail.
“If they don’t understand that, they will have a tough time understanding auto financing and its nuances,” Koblenz says.
Last year, the Obama Admin. urged Congress to include dealers in the Dodd–Frank Wall Street Reform and Consumer Protection Bill calling for, among other things, more regulation of lending and the creation of the Consumer Financial Protection Bureau as an overseer.
Congress considered making dealers part of the legislation because they often facilitate indirect lending by linking customers to lenders. Dealers successfully argued that their middleman role didn’t make them lenders subject to amped-up finance-reform laws.
Dealers felt momentarily relieved. “It’s a wonderful thing to be victorious when you are going up against the President of the United States,” Wade said after dealers were excluded from the bill.
But Congress has authorized the Federal Trade Commission to include dealers in potentially drafting expanded rules against unfair, deceptive and abusive practices.
“The FTC is exploring whether additional oversight is needed,” Wade says.
It would effectively apply to all dealers, says Michael Benoit, an attorney who specializes in representing dealer interests. “After years of jurisprudence, we know what unfair and deceptive practices are and how to deal with them.
“I’m pretty sure something that is abusive is unfair, but we don’t know the definition of abusive practices,” he says, likening it to a U.S. Supreme Court justice who once said of pornography: “I can’t legally define it, but I know it when I see it.”
The Consumer Financial Protection Bureau defines abuse as interfering with a consumer’s ability to understand a term or condition, or taking unreasonable advantage of a consumer who lacks an understanding of risks and costs.
“That’s not particularly helpful,” Benoit says during a Dodd-Frank Act update at the F&I conference. “Does it mean you don’t try to get more for the car from an unsophisticated customer?”
He speculates the FTC and CFPB will work together on the possibility of drafting new rules on dealer involvement in auto financing, with the FTC ultimately serving as the enforcer.
No one yet has formally proposed additional regulations, but a lot of ideas have been tossed around, particularly at fact-finding roundtable discussions the FTC has been holding around the nation, including Detroit and San Antonio.
NADA credits FTC officials for keeping an open mind. But some public comments at those sessions have jarred dealers. For instance, some people beefed that dealers gouge consumers by charging to help set up auto loans.
“I was shocked at what certain people said at the Detroit hearing,” says Gary Allgeier, director-financial services for the Suburban Collection, a dealership group with stores in Michigan and Florida.
Complaints were voiced at the San Antonio forum that some finance managers at dealerships near military bases took advantage of service personnel. Consumer activists called it a common-enough practice to warrant more government regulation of indirect lending and dealers.
“I was stunned when that opposition came up,” Wade says. “We pointed out we support the military, many of us have served in the military and we provide car- financing education programs to the military.”
He accuses consumer activists of using anecdotes about a few bad apples to implicate an entire industry.
Holly Petraeus, wife of retired Gen. David Petraeus, the current CIA director, spearheads a group calling for greater government involvement to make sure dealers treat military people fairly.
“I admire her for that, but she doesn’t have a firm handle on how the finance-services industry works,” Benoit says. “Folks at the top give her a lot of deference and she has the ear of the president. But she is learning that a lot of what she wants to happen won’t happen.”
He cites a grievance about a serviceman who bought a car on a finance plan and felt stymied when told he couldn’t ship it to Afghanistan while the loan was still outstanding.
Despite the soldier’s vexation, it is not unfair, deceptive or abusive for a lender to bar a borrower from sending a car overseas without paying off the loan, Benoit says.
Holly Petraeus and her supporters “are concerned about dealers who prey on the military, and they want service people to know what they can and can’t do,” he says. “That’s fine, but why just military folks?”
At the Detroit session, consumer advocates claimed dealerships profited too much from indirect lending. They particularly objected to an industry practice of dealers adding a so-called reserve to the lender’s interest rate.
The typical reserve rate has fluctuated over the years, and in the past there have been court-documented allegations of excess. But today a typical reserve rate is 1 to 2 percentage points. If a lender offers a 5% annual interest rate, the customer might end up paying 6% if financing through a dealership.
Some consumer activists claim that is unjustified. Dealers say it is a legitimate charge for services rendered. They note that, because of their access to various lending sources, they often can offer better rates than if car buyers got financing on their own.
“Dealer-assisted financing provides more competitive rates,” Wade says. “I bend over backwards for my customers. Sometimes, I shake my head at what we do.”
One consumer-rights advocate speaking at the FTC roundtable in Detroit said government should force dealers to disclose their profits from indirect financing.
Another proposed limiting dealer loan fees to a flat rate of $25 to $100. Some claim any dealer add-on is an overcharge.
“We try to point out that it is flawed to say dealer compensation is an overcharge,” Koblenz says of NADA’s lobbying efforts.
“Dealers add value, work with the customer and do work for the lender, from collecting credit information to preparing the loan application,” he says. “The dealer charge is compensation for that.”
Benoit agrees, saying: “Lenders outsource paperwork and credit applications to dealers. Finance companies transfer to dealers the cost of closing loan transactions. A higher loan rate covers the dealer’s costs.”
He disputes claims by consumer-advocate groups such as the Center for Responsible Lending. It says consumers who finance cars through dealerships “pay over $25.8 billion in additional hidden interest over the lives of their loans.”
One citizen at an FTC forum proposed a law requiring dealerships to post signs saying dealers profit from arranging car loans. Benoit scoffs at that, likening it to requiring grocers to put up signs saying they make money selling tomatoes.
Every auto loan rate has both a wholesale and retail part to it, notes NADA spokesman Charles Cyrill.
That’s the case “whether they are divided between two parties, as in the case of dealer-assisted financing, or they are handled by a single party, as in the case of a direct loan from a bank or credit union,” he says.
Existing regulations apply to dealer-assisted financing, Wade says, arguing against more of them. “Tools already are in place to deal with bad actors. New rules just put extra burdens on the good actors. Don’t make it illegal twice.”
The NADA chairman urges government officials considering additional dealer regulation rely on valid industry-wide data, not anecdotes or old horror stories about someone’s bad dealership experience.
Fending off the possibility of more financing regulations became a NADA priority this year and will continue as one into 2012. Dealers think they hold a strong hand but worry that people can play wild cards in Washington.
“We need to be sure to seek real solutions that work in the real world, rather than something perceived as workable in Washington, which has been described as 60 square miles surrounded by reality,” Koblenz says.
Yet, he and Wade praise the way the FTC has conducted its fact-finding in trying to determine if more dealer-related regulations are needed.
David Vladeck, head of the FTC’s Bureau of Consumer Protection, “has said he is very much in a listening mode,” Koblenz says. “Possibilities range from doing nothing to new legislation. In the middle are education programs.”
The last thing NADA wants is a brawl with the federal government, Wade says. “All we want is what is best for our customers in the real world.”
The trade group’s game plan relies a lot on repetitiveness. “We’ve just got to explain the indirect-lending process over and over,” Koblenz says. “It is not thoroughly understood in Washington.”
He adds, “When the indirect-lending model is explained to a regulator with an open mind, we think it will prevail as a healthy system.”
Benoit expresses relative confidence the FTC “won’t go on a rule-making binge.” But he adds, “This industry will have to be vigilant in making sure people have the right information.”