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Where Do You Stand?

June 4, 2010

So, where do you stand on finance reform? I thought the answer to that question would be fairly cut-and-dry when I posted it on the F&I Forum. Well, I was wrong.

Being that we need finance sources like we need air and water, as one forum member put it, I figured everyone sided with lenders on finance reform. Apparently not, especially after I posted a story in April about lenders feeling a little better about things. “Lenders are feeling better? About what? Causing the largest automotive collapse ever recorded,” read one forum post.

I guess I forgot that the very people who work on the front lines of our industry — those who would stand to benefit the most from fewer regulations — are the ones who were hardest hit by the credit debacle. And from what I read, no one is ready to pass the buck. “Folks, it was all areas of business [that were the cause of the crisis],” one member wrote. “We need to all start taking responsibility for our actions.”

No one can deny that the industry enjoyed the fast times, when 125 percent and 175 percent loan-to-value ratios weren’t the exception. Yes, we had nothing to do with what took place on Wall Street, but I don’t think there’s a F&I manager out there who can say he or she didn’t stick a customer into too much car.

Let’s not forget, however, that there were only two downgrades of auto-related, asset-backed securities instruments during the downturn — one of which was related to Chrysler’s troubles last year. But then again, what would have happened if the mortgage industry was putting people in houses at 125 percent LTV?

Lenders on the forum also chimed in. “YOU DON’T WANT MORE REGULATION,” wrote one lender. His point was that the market which caused the credit crash was created for “crap” paper. Now that a market for crap paper no longer exists, he added, there is no need to police it.

Other lenders on the forum said the real losers in an overregulated market are the people these regulations are intended to protect: the customers. One lender even said the impact of regulations implemented since the beginning of the crisis has him spending more time with his compliance team these days than looking for ways to increase business. He said if this trend continues, his organization might have to reconsider its ability to offer indirect loans.

And frankly, that’s what the National Automobile Dealers Association sees. They know consumers will see fewer finance options and higher rates and/or fees as a result of more regulations.

The consensus among forum members was that reform should start with Wall Street, with one member suggesting that the Glass-Steagall Act of 1933 be reinstated. Repealed in 1999 by the Gramm-Leach-Bliley (GLB) Act, the law had erected a wall between the banking and securities industries by prohibiting individual institutions from acting as any combination of an investment bank, a commercial bank and an insurance company.

It is believed that the GLB — a law championed by Republicans Phil Gramm, Jim Leach and Thomas J. Bliley — created a free-for-all for many of those companies considered “too big to fail” when former President Bill Clinton signed it into law.

So, is that the solution? A forum member who claimed to have worked with one of the Big Five brokerage houses in the early ’80s didn’t think so, as he said financial institutions had already poked enough holes into the Glass-Steagall Act to render it ineffective.

My hope is that if our industry is unsuccessful in getting a pass from finance reform — which doesn’t seem likely after the U.S. Senate voted 60-30 to include the dealer exemption amendment in future versions of the financial reform bill — that the new watchdog will take a close look at the effectiveness of current laws governing the F&I office. See, it’s my contention that many of the safeguards in place today are taking the customer’s eye off the ball.

Elizabeth Warren, the Harvard Law professor who sits on the Congressional Oversight Committee, shared my opinion when the magazine interviewed her for a story back in October 2007. We sought her out after she posed this wacky idea about creating a Financial Product Safety Commission, one that she said would actually benefit auto retailers.

“Many of the disclosure forms are nonsense,” she said at the time. “They can make a cheaper loan look more expensive and a more expensive loan look cheaper. Worse yet, there is so much required fine print that most people get lost in it.”

I called her office to see if she still felt that way, but it went unanswered. Let’s just hope she still believes that if the tide turns and the dealer exemption gets excluded.

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