Published May 13, 2010, Los Angeles Daily Journal – In some of the most sweeping legislation to hit Capital Hill in years, Senate Financial Reform Bill “S. 3217” is about to change the financial industry’s landscape for good. And, that’s not welcome news for everybody.
Acting in response to the 2008 financial market meltdown, the Senate is set to begin voting this week on S. 3217, which would create the “Bureau of Consumer Financial Protection” – an agency to be charged with overseeing virtually all consumer-related financial products. The new agency, or the BCFP as it will likely become known, will be given total oversight to stomp out “unfair, deceptive or abusive” lending practices, and will apply to industries far and wide. As President Barack Obama proclaimed, he will block all efforts to exclude from the new agency “banks, credit card companies or non-bank firms such as debt collectors, credit bureaus, payday lenders or auto dealers.”
If the intent was to create an 800-pound gorilla in the financial markets, the bill succeeds. In addition to having unfettered oversight to halt any practice the agency determines to be unfair, deceptive or abusive, the BCFP will be required to “conduct examinations” of persons it considers to be “larger participants” of a market. For auto dealers who fall into this category (the BCFP will be left to define what a “market” is, and who is a “larger participant” of that market), they would have to register with the government, and their principles, officers, directors and key personnel may have to undergo background checks by the government.
The intent of the proposed legislation appears to be pure: provide important oversight to the financial industry to prevent a repeat of the 2008 debacle. But, in the haste to prevent this situation from ever reoccurring, one has to wonder whether the current legislation is being driven by reason or by fear. History is replete with hastily-made decisions that appear appropriate when made, only to later cause us to cringe when reminded that we ever engaged in such rash conduct. If there is any doubt on this, just ask any of the 110,000 Japanese Americans who were whisked away into internment camps during World War II.
With the auto industry employing, in one form or another, one out of every six persons in the United States, the question of whether the legislation should apply to the nation’s 17,000 auto dealers should not be taken lightly. This is particularly true at a time when the auto industry sold 300,000 fewer vehicles in the United States in 2009 than in 1965 (10.6 million in 2009 versus 10.9 million in 1965), and when goliaths such as General Motors and Chrysler – once thought impenetrable – are toppling under the weight of insurmountable debt. A misstep with this industry could have a dramatic impact on our nation’s ability to climb out of our economic freefall.
While the proposed legislation may be appropriate, or even necessary, for the mammoth institutions of Wall Street, the same cannot be said for the auto dealers of Main Street. Auto dealers are already one of the most heavily regulated segments, governed by the Federal Trade Commission, the Federal Reserve Board, the Fair Credit Reporting Act, the Truth in Lending Act, the Federal Consumer Leasing Act, and the Gramm Leach Bliley Act. Adding yet another layer of oversight, such as the BCFP, to an already over-burdened process would only serve to require further infrastructure in dealerships, and result in higher prices for consumers.
The legislation would also undoubtedly spawn further consumer litigation against dealers, the cost of which also gets passed on to the consumer. Whether it is a violation of Business and Professions Code Section 17200, the Consumer Legal Remedies Act (Civil Code Section1780), or the “single document rule” (a requirement that all terms of a loan be contained in a single document), dealers are uniquely positioned to receive attacks from consumers for what are often times hyper technical applications of law. Readers may recall the event in the early 2000s where a southern California law firm filed more than 2,000 lawsuits against auto dealers and repair shops in California for trivial violations, such as abbreviating the words “on approved credit” (O.A.C.) in a print advertisement.
As the bill has been making its way through Congress, at least one Senator has recognized the chilling effect that S. 3217 will have on the auto industry. After the Senate offices received floods of letters and visits from concerned dealers, Senator Sam Brownback (R., Kan.) drafted an amendment to S. 3217 that would exempt nearly all of the nation’s dealers from the new consumer protection law. This carve out – what has become known as the “Brownback Amendment” – is set to be voted on by the Senate in the upcoming days. If the Amendment passes, auto dealers will escape the grip of a frightened Congress, and be permitted to rebuild their industry without the added weight of additional governmental oversight. As the vote takes place, one can only hope sound judgment will prevail.