As financial reform legislation has worked its way through congress, there has been a whole lot of noise about how those politically-savvy car dealers got themselves excluded from the regulatory reach of the soon-to-be-created Consumer Financial Protection Bureau (CFPB), assuming it passes the Senate.
News flash! If you are a typical independent dealer, you won’t be excluded from the CFPB’s authority. “How can that be?” you may ask. Simple, you don’t have a service department.
Here’s how the auto dealer exclusion provision in the bill reads:
SEC. 1029. EXCLUSION FOR AUTO DEALERS.
(a) SALE, SERVICING, AND LEASING OF MOTOR VEHICLES EXCLUDED—Except as permitted in subsection (b), the Bureau may not exercise any rulemaking, supervisory enforcement or any other authority, including anyauthority to order assessments, over a motor vehicle dealerthat is predominantly engaged in the sale and servicingof motor vehicles, the leasing and servicing of motor vehicles, or both.
As usual, the devil lies in the details, and these details say that auto dealers primarily engaged in the sale and servicingof motor vehicles, the leasing and servicing of motor vehicles, or both, are excluded from the regulatory reach of the CFPB. Note that the dealer must have a servicing function and a sales and/or leasing function. Since not many independent dealers maintain a service department, that limits the exclusion to franchise dealers in most instances.
Even having a service operation won’t ensure exclusion from the CFPB’s authority. If a dealership has a service department, but doesn’t sell its retail installment contracts to an unaffiliated finance company, the dealership loses the exclusion.
There had been more than a little confusion (even among people who should know better) about the scope of the dealer exclusion. It’s hard to see why, considering the language dealing with the servicing requirement has been in the original House bill since last fall, but that’s just the first hurdle.
The original language required the dealer to “routinely” sell its paper to a third party. Through some last-minute negotiations, Congress clarified the scope of this requirement by revising it to require sale to an “unaffiliated” third party. That eliminates the exclusion for dealers who sell their paper to their own related finance companies.
The bill itself is over 2,300 pages long and we haven’t digested the entire thing yet. It may be that dealers foreclosed from the Section 1029 exclusion could qualify for other exclusions contained in the bill, but that remains to be seen.
We suspect that as the dust settles, more questions will arise. When they do, check back with us—assuming the bill passes (and that’s likely, but not guaranteed as we write this)—we’ll probably still be trying to figure out what it all means.