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4 Threats to F&I

July 2009, F&I and Showroom - Feature

by Michael Benoit

Washington sure can react to a crisis, but the real question is, “How effectively can Washington react to a crisis?” Apparently not well for you, or so pending legislation on Capitol Hill would have us believe. Pair recent Congressional actions with the troubles dealers are facing and you have a potential recipe for disaster. Here’s the lowdown on four current bills that will negatively impact your business if passed.

The Arbitration Fairness Act (HR 1020) would ban pre-dispute mandatory arbitration clauses in employment, consumer and franchise agreements. It would also give courts sole jurisdiction over the validity or enforceability of an arbitration agreement.

While dealers may see some benefit to this legislation given recent actions by automakers, there’s plenty not to like as well. Should it pass, the bill would increase creditor assignees’ exposure to class actions and unpredictable jury awards, increasing the costs of credit while limiting its availability.

The Interest Rate Reduction Act (HR 1640) would limit the annual percentage rate (APR) on consumer transactions to no more than 15 percent. The Federal Reserve Board could increase the cap for periods of up to 18 months under certain circumstances. Violators would also be subject to a civil penalty.

If this bill passes, say goodbye to special finance, the used-car industry, and the economy. If folks can’t buy cars, they can’t get to work. And if they can’t get to work, they won’t be spending any money.

The Consumer Credit & Debt Protection Act (HR 2309) would grant authority to the Federal Trade Commission (FTC) to expedite rulemakings concerning consumer credit or debt. It also directs the FTC to examine and promulgate rules with regard to debt settlement and automobile sales. Among other things, it requires the commission to consider adopting rules that would restrict post-sale changes in financing terms; 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; and limit the ability of dealers to receive compensation for arranging financing or assigning a credit contract based on the interest rate, the APR, or the amount financed.

This bill comes with a host of well-intentioned provisions that create significant issues for dealers. And I would not be surprised to see the FTC expand its powers under this bill to all retailers of motorized goods.

The Consumer Credit Fairness Act (SB 257) would amend federal bankruptcy law to require the bankruptcy court to disallow any claim arising from a high-cost, consumer credit transaction (i.e., a credit extension resulting in a consumer debt with an applicable APR, including related costs and fees, that exceeds, at any time while the credit is outstanding, the lesser of: the sum of 15 percent and the yield on U.S. Treasury securities having a 30-year period of maturity (currently about 19 percent); or 36 percent). The bill also protects a debtor from mandatory consideration for dismissal or conversion to a case under Chapter 11 or 13 if his or her debts arise from a high-cost consumer credit transaction.

This bill is an inducement to bankruptcy for any special finance borrower who would otherwise try to work out an agreement with his or her creditors. Not only are all his or her obligations protected from conversion to a Chapter 11 or 13 if he has even one high-cost credit transaction, the security interest related to such a transaction will be effectively void. Not only will the creditor be prohibited from collecting on the debt, it’ll have to give the collateral to the debtor free of any liens.

As of early June, all of these bills were in committee, with the last two (HR 2309 and SB 257) seeing the most activity. What’s unfortunate is any one of these bills could seriously impact your ability to operate your business. My advice? Talk to your representatives in Washington and let them know what these bills mean to you, your business and your community, and see if we can’t find some middle ground.

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. Michael 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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