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No Time to Celebrate

June 2010, F&I and Showroom - Feature

by Tom Hudson and Michael Benoit

Let’s recap car dealers’ efforts to obtain an exemption from the oversight of the new consumer financial protection agency (or bureau — the final structure remains to be seen) created by the recent House and Senate financial reform bills. You succeeded in getting the House bill amended to exempt at least some of you. You were unsuccessful in obtaining an exemption in the Senate bill, but you were successful in convincing the Senate to pass a measure instructing the Senate conferees to advocate for the exemption in the House bill in the upcoming conference.

For those of you not versed in Washington-speak, a conference occurs when the House and Senate pass similar, but somewhat conflicting bills. In conference, a group of senators and representatives will get together to work out the differences between the two bills. Good news, right? Maybe not.

First off, the Senate conferees are under no obligation to abide by the instruction, and Sen. Christopher Dodd (D-Conn.), the lead Democratic Senate conferee, is outright opposed to the exemption. If you’ve heard him speak about this, you will have noticed that he lacks a fundamental understanding of auto finance, but that is neither here nor there. Politics is rarely inconvenienced by facts.

Even if the exemption makes it through conference and to President Obama’s desk, you’re not out of the woods. That’s because the House exemption creates a lot of uncertainty, and more than a few “exempted” dealers could be caught in the new regulatory web.

Here’s the operative language from the House bill:

“(1) The Director and the Agency may not exercise any rulemaking, supervisory, enforcement or any other authority, including authority to order assessments, over a motor vehicle dealer that is primarily engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both.”

Sounds great, right? Not so much. If a dealer isn’t primarily engaged in “selling and servicing” or “leasing and servicing” motor vehicles, there is no exemption. That’s right, no servicing business, no exemption. You buy-here, pay-here dealers (BHPH) better hang onto your hats.

Problem No. 2: Let’s assume you’re either a typical franchised dealer with a service department, or that fairly unusual independent or BHPH that has a servicing business. You’re exempt, right? Whoa, Nellie — not so fast. The exemption comes with a big “but.” Contrary to Sen. Dodd’s assertion on the Senate floor a few weeks ago, there are a whole lot of you who don’t get the exemption. The relevant “exemption from the exemption” language says:

“The provisions of paragraph (1) shall not apply to any person to the extent that person:    

“... operates a line of business that involves the extension of retail credit or retail leases involving motor vehicles, and in which:

“(i) the extension of retail credit or retail leases is routinely provided directly to consumers; and

“(ii) the contract governing such extension of retail credit or retail leases is not routinely assigned to a third-party finance or leasing source.”

This effectively removes any exemption for dealers who hold their own paper (e.g., BHPH). The problem is in clause “(ii),” where it says the exemption doesn’t apply if the dealer’s contracts aren’t “routinely assigned” to “a third-party financing or leasing source.”

Now, you can bet there will be an argument about what “routinely assigned” means. Does it mean all of your contracts? A substantial portion? We don’t know. But there is sure to be a fight about it, and if it’s the new agency you’re fighting with, rest assured that most of you will decide to roll over and submit to whatever they say. Your budget for litigation expenses doesn’t come near the pot of cash they’ll have available.

Assuming we get clarity about what “routinely assigned” means, there’s the question of what a “third-party finance or leasing source” is. Most dealers in the BHPH business create a related finance company for tax and liability purposes. It’s a separate corporate entity, so it seems logical that the RFC would be a “third-party finance or leasing source,” right? Maybe it is, maybe it isn’t.

The problem is the term isn’t defined. What happens if, by regulation, the new agency decides it doesn’t include a RFC you control or own? There goes your dealership’s exemption. This may not be terrible since the dealer exemption wouldn’t extend to the RFC in any event, but if the new agency can start messing around in your F&I office, all bets are off.

All that said, even if you end up being exempted, don’t pop the champagne cork just yet. The new agency will have rulemaking authority over your financing sources in all events, and it is a near certainty the new agency won’t be able to resist the temptation to rewrite many of the existing regulations that presently control a lot of what goes on in the F&I office, like Regulation Z. But we can always hope.

An exemption would be nice. It would mean that federal auditors won’t be setting up shop in your back office to pore over your documents and procedures, or require you to prepare and submit lengthy and detailed reports. Plus, you wouldn’t be assessed for the costs of running the new agency. All good things, but the finance world is fast changing. The one thing you can put your money on is that “business as usual” will soon have a whole new meaning for your dealership.

Thomas B. Hudson Esq. and Michael Benoit are partners in the law firm of Hudson Cook LLP and the authors of several books, including the recently released Carlaw III: Reloaded. For information regarding the books, call (401) 865-5411 or visit www.counselorlibrary.com. Copyright CounselorLibrary.com 2010, all rights reserved. Based on an article from Spot Delivery. Single print publication rights only to F&I and Showroom magazine. HC# 4822-7767-8086 (7/10).

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