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Compliance

Legislators in Need of Cooling-Off Period

June 2009, F&I and Showroom - Feature

by Michael Benoit

On May 12, Congress held a hearing on a bill that would give the Federal Trade Commission broad new powers to regulate automobile dealers. The bill, H.R. 2309, directs the FTC to adopt rules that prevent unfair and deceptive practices by dealers regarding credit and lending. While certainly well-intentioned, the bill would severely curtail consumers access to their cars — while making it next to impossible for you to operate your business.

Under the proposed legislation, the FTC must consider adopting rules that would:

· Restrict post-sale changes in financing terms (i.e., severely limit or ban spot deliveries).

· Give consumers the right to rescind a sales contract within a specified period after receiving the final information regarding the terms of the sale or financing (e.g., a three-day “cooling off” period).

· Limit the ability of dealers to receive compensation for arranging financing or assigning a credit contract based on the interest rate, the annual percentage rate, or the amount financed (i.e., restrictions on dealer participation).

Restricting post-sale changes in financing terms not only impacts dealers who spot deliver, but finance companies as well. The bill’s broad language would cover servicing activities, such as term extensions, rewrites, payment schedule modifications, etc. These activities allow distressed consumers to continue in their contracts and keep their cars. Without them, repossessions will increase and consumer options in times of need will be greatly limited.

Giving the consumer the right to cancel a sale sounds good in theory, but fails in practice. Car purchases are rarely impulsive buys. We know that by the number of people who come into the store armed with data from Edmunds.com and other research services. And once a decision is made, consumers are rarely inclined to wait. They want their new car. Unfortunately, a “right to cancel” is likely to take the form of a multi-day “waiting period” that no one will like.

Why? As a practical matter, you’re not going to let the consumer drive off in their new car until the waiting period expires to avoid titling issues. Of course, you could let them drive their trade during the waiting period, but what if it suffers a significant loss in value during that time? Then you have to rewrite the deal, which will either violate the restriction on post-sale changes in financing terms or restart the cooling off period.

And what if you deliver the vehicle before the waiting period expires? A vehicle sold as “new” but returned during the waiting period may have to be reclassified as “used,” which would lower its value. Would you view that as an undue financial burden? I would. My suggestion is that if Congress is so sure this cooling off period will benefit consumers, give them the opportunity to waive it.

Despite the negative testimony at the hearing, there is little data to suggest the existing method for computing dealer compensation has been abused or unfair to consumers. Today, rate markups tend to be capped, and consumers are, or should be, well informed that they can negotiate rates.

The bill’s prohibition on certain forms of dealer compensation seems to conclude that the consumer will receive a financial benefit because you get paid less. That’s likely true, but they’ll need to show up at the dealership with their own financing — as the days of dealer F&I will be over. Not only will many consumers be left without the ability to get financing, but those that do will have to work outside the dealership to find a direct lender to finance the purchase. This is bad enough for A-paper customers, but potentially devastating for the myriad of customers who don’t have access to traditional banking relationships.

One would think Congress would be sensitive to the impact this bill could have on your business, but recent events with Chrysler and GM might also lead one to conclude that Congress isn’t much concerned with you. In any event, if this bill causes you to lose sleep at night, let your Congressperson and your trade associations know.

Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He is a frequent speaker and writer on a variety of consumer credit topics. He can be reached at michael.benoit@bobit.com. Nothing in this article is intended to be legal advice and should not be taken as such. All legal questions should be addressed to competent counsel.

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