Tag Archive | "financial reform"

Obama Signs Sweeping Finance Bill into Law

President Barack Obama signed the most sweeping set of financial rules since the Great Depression today. The legislation spared auto dealers from oversight by a new Bureau of Consumer Financial Protection while increasing scrutiny of auto lending practices, reported Automotive News.

White House officials said Tuesday that the new law will level the playing field and grant the consumer watchdog agency oversight of auto loans made by banks or by auto finance companies such as Ford Motor Credit or Ally Financial Inc.

“One of the big objectives of the bill is to level the playing field,” said Diana Farrell, deputy director of the White House National Economic Council, said in comments published today in The Detroit News.

“The auto dealer lenders will have a hard time competing with really very high fees or practices against” loans made by banks and auto lenders that will be subject to new oversight.

The bill also gives additional authority to the Federal Trade Commission to continue oversight of auto dealer lending practices.

Consumer watchdogs wanted dealers included under the new agency’s supervision. Dealers originate $250 billion in car loans a year, or about 80 percent of all auto loans, the News said. Consumer advocates warned dealers may take advantage of car buyers through hidden fees or other improper practices.

Ed Tonkin, chairman of the National Automobile Dealers Association, said car buyers will benefit from the new law because it preserves dealer-assisted financing as a convenient and affordable consumer option.

“The newly created Bureau of Consumer Financial Protection will have direct federal oversight over all auto loans and those that underwrite, fund or service auto loans, such as banks, credit unions, finance companies and `buy here-pay here` operations at dealerships,” Tonkin said. “As the new law is fully implemented, we urge regulators to closely examine how new rules will impact a family’s ability to finance a vehicle.”

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Congress Passes Wall Street Reform, Sends to Obama for Signing

WASHINGTON – The U.S. Congress has approved the broadest overhaul of financial rules since the Great Depression and sent it to President Barack Obama to sign into law, Reuters reported.

By a vote of 60 to 39, the Senate gave final approval to a sweeping measure that tightens regulations across the financial industry in an effort to avoid a repeat of the 2007-2009 financial crisis.

Auto dealers, after months of debate, won a hard-fought exemption from the measure.

Obama will likely sign the bill into law next week, the White House said.

The legislation, which had been opposed by banks, leaves few corners of the financial industry untouched. It establishes new consumer protections, gives regulators greater power to dismantle troubled firms, and limits a range of risky trading activities by banks in a way that would curb their profits.

With Republicans poised for big gains in the November congressional elections, Democrats are eager to show voters that they are cracking down on an industry that touched off the worst recession in 70 years.

“I regret I can’t give you your job back, restore that foreclosed home, put retirement monies back in your account,” said Democratic Senator Christopher Dodd, one of the bill’s chief authors. “What I can do is to see to it that we never, ever again go through what this nation has been through.”

It is not clear whether voters will give Democrats credit.

The public’s awareness and understanding of financial regulation is very low, according to a new poll from Ipsos released today.

Of those polled, 38 percent had never heard of the reform, while 33 percent had heard of it but know nothing about the legislation. Other polls show that voters’ views of the reform fall mostly along party lines.

The bill has also won Democrats few friends on Wall Street as wealthy donors have started to steer more campaign contributions to Republicans.

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Small Businesses Could See Relief in Financial Reform Bill

As lawmakers return from the Fourth of July recess, the Senate is expected to vote on the financial reform bill approved by the House last week — with a provision affecting credit and debit card fees that is likely to benefit small businesses, AOL Small Business reported.

Although the Senate version of the bill spearheaded by Richard Durbin (D-Ill.) made concessions on the issue to appease the House, which passed its version on Wednesday, the compromise measures are still expected to provide relief for small-business owners.

“Swipe fees have long been a problem for many small businesses, and though the compromise doesn’t go as far as [we] would prefer, it does offer some relief,” the National Small Business Association said in a statement.

In the compromise bill, the Federal Reserve has the authority to enforce credit and debit card fees so they are “reasonable and proportional to the actual cost incurred” in a transaction. While fees charged by Visa, MasterCard and others will face no government regulation, issuers will be required to provide merchants with more processing options. This competition could drive down processing fees.

The bill bans merchants from offering discounts for transactions processed through one card network over another, but allows discounts for certain forms of payments, whether check or cash. The card networks will be permitted to limit the minimum transaction to $10, though the Fed can raise this threshold over time.

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A Consumer Product Safety Commission for Dealers? What if…?

On April 14, I saw an NADA alert to dealers that made me stop and think “What if?” The subject of the alert was “Auto Financing May Be at Risk.”

My initial thought was “What are they talking about!?” Then I began to contemplate whether this was possible. Even though the idea of dealer-assisted financing going totally away seemed farfetched, the thought of it scared me a little. After all, I – like many of the AE readers – have invested my heart and soul into this business, not to mention a significant part of my personal worth.

After considering all the options of this legislature, which I will spell out for you in this article, I concluded that the headline “Auto Financing May Be at Risk” was certainly an alarmist way to look at the situation. However, to assume that life as we know it in “Finance and Insurance” will be the same is probably naïve.

NADA has followed up that headline with many more in the last couple months:

  • May 12: Financial Overhaul Pits Military Against Car Dealers
  • May 13: Auto Dealers Take Issue with Misleading Statements from White House on Finance Reform
  • May 20: Brownback Amendment is Pro-consumer and Keeps Auto Credit Affordable
  • May 25: Senate Sides with Auto Dealers
  • May 28: Obama Administration wants Auto Dealers Subject to New Oversight
  • June 2: Congressional Overhaul of Financial Regulation Is Down to the Wire

Where Are We Now?

The House of Representatives has created a bill that will exempt auto dealers from the equivalent of a Consumer Product Safety Commission. The Senate bill didn’t go that far but a majority of senators have voiced support for the exemption through the Brownback/Campbell bill.

In early June, negotiators from the Senate and House worked on merging the two versions of financial reform and both parties should vote to pass the bill. The Obama administration has come out forcefully against the dealer exemption and will try to affect the final outcome. So it’s safe to say F&I as we know it is certainly in the balance.

I am one that tries to focus on only things that I can control, so the outcome – although it seems to be in our favor – isn’t going to change much in my opinion.

Sure, we can and should assist the lobbying effort toward exempting car dealers, but I prefer to focus on the “What if?” What are the potential outcomes if dealers are exempted from the Financial Reform Agency? What if they are regulated under the new Consumer Product Safety Commission Agency?

What if Dealers Are Exempted from the Financial Reform?

There have been valid arguments on both sides about whether to include dealers in the financial reform bill. The armed forces argue that extra consumer protections are needed because dealers often employ high-pressure tactics to trap military families into expensive loans. Although to date they haven’t brought any examples forward, I’m sure they’ll be able to find enough of them to make this issue look larger than it is.

Deputy Communications Director Jen Psaki points out that auto dealer-lending represents an $850 billion industry, which is larger than the entire credit card industry and makes nearly 80 percent of the automobile loans in our country. This is why President Obama is staunchly against exempting dealers.

Others argue that this is simply a left-wing attempt to grab as much power while they have the chance. Many argue that dealers or “Main Street” did not cause the financial meltdown, but rather it was Wall Street and dealers shouldn’t be included in the bill. They further argue that the Federal Trade Commission already regulates dealers, so it’s not necessary to include them in the police powers of the new agency. They further claim that all it will do is make financing more expensive to customers.

At this point, it looks like dealers will be exempt. What does that mean to our industry? Is it business as usual? I doubt it. Some will read dealers being exempt as an opportunity to abuse customers even more than they had in the past. That is, to try and take advantage of customers who are poorly equipped in financial matters. We all know these dealers do exist, but they are a small minority.

I think it’s safe to say that our business will see this as an opportunity to self regulate, and lenders will move to limit reserves. Some will even move toward paying just flat dollar amounts per contract. They might even limit markups on aftermarket products.

I think you’ll see states step in and try to regulate how business is conducted in their states. We should expect the left-leaning states especially to move in this direction. Politicians need “causes” to perpetuate their existence and attacking the big bad dealer will certainly be a popular one.

What if the Consumer Product Safety Commission Agency Regulates Dealer-assisted Financing?

I don’t think we can rule out that we could be included in the financial reform bill. What if this happens? Does this stop dealer financing? Of course not!

As Psaki points out, dealers make nearly 80 percent of automobile loans. That is a distribution network that lenders count on. Lenders have evolved over the last 10 years to centralized lending. They simply don’t have the human resources capable of handling the demand for auto loans.

How will we be affected by the new agency? Will dealer reserves be limited? Probably.

Will markups on products be restricted? Maybe.

What is certain is that transparency will be enforced. Menu selling has already been defacto required in states like California with the Car Buyers Bill of Rights. I think we can expect either mandated flat reserve or a required disclosure of reserve point markups.

Will this help or hurt the independent agent or aftermarket product provider? How about the dealer? One could certainly argue that if a dealer is restricted on how much reserve he can make or how much he can mark up the products he sells, the result will be higher product sales.

Furthermore, I believe a more transparent process leads to not only a satisfied customer, but also to addition product sales for dealers and industry people. A clear example of this is how menu selling has revolutionized how we do business in the F&I office and dealers have never seen greater F&I profits.

Time to Make a Choice

I like to use the following example when it’s time to make a difficult choice. “Pretend someone put a gun to your head and said ‘pick one!’”

It is my preference that dealers are not included in the bill. I don’t like the fact that government wants to regulate further an industry that is already regulated by the Federal Trade Commission. We didn’t cause the problem, and indirect lending delinquencies have remained stable considering our unemployment rate.

Ed Tonklin, chairman of NADA, said it well: “Dealer-assisted financing – which is always optional – regularly affords consumers more favorable terms than those available through other sources.”

He’s right. F&I managers have many sources available to them to assist the customer with financing. This enables some customers to get financing when they otherwise might not have, and the system encourages the lenders to be competitive to get the customer and the dealer’s business.

In summary: if it’s not broken, don’t try to fix it!

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Wall Street Reform: Congress Starts to Deal

WASHINGTON – Wall Street reform negotiations officially kick off Thursday, when lawmakers are expected to start merging two different versions of sweeping changes to the financial system into one final bill, reported CNNMoney.com.

Among the key issues that need to be resolved: Whether to limit banks’ trading activities and how the kinds of risky bets that helped get AIG into hot water.

The Senate passed its version in late May and the House passed its version last December. On Thursday, more than two dozen top Democrats and Republicans from both chambers will meet and give speeches.

Senate Majority Leader Harry Reid, D-Nev., said Monday he hopes to wrap up work on the final negotiated product before the end of the month. The goal, according to congressional aides, is to finish reconciling the bills in time for President Obama to have progress to report when he heads to Canada on June 25 for the G-20 meeting.

The Democrats hope a final vote in both the House and Senate will take place before July 4.

“The bills both the House and Senate passed will enforce the toughest protections ever against Wall Street greed, will guarantee taxpayers they will never become too big to fail,” Reid said Monday.

The bills are pretty similar in many respects. Top Obama administration officials stressed in a briefing in late May that both bills met the president’s call for “strong comprehensive reform.” But they stopped short of saying the president would sign the final product.

“It stands to reason that the likely outcome of this (conference process) is a bill that meets the true test of reform as the president has laid out,” said Diana Farrell, deputy director of the White House National Economic Council.

But there remains a couple of key differences in the bills, including some that divide Democrats within their own party. Over the past two weeks, congressional staffers from both chambers have been meeting to detail all the differences so lawmakers appointed to negotiate can move quickly.

Here are some of the biggest issues in play:

Proprietary trading: In the Senate bill, the Volcker rule, named for former Federal Reserve chairman Paul Volcker, directs regulators to limit the size and scope of banks’ investment activities. The rule would direct regulators to create rules that would stop banks from owning hedge funds and trading for their own accounts. The House bill doesn’t include the Volcker rule.

Derivatives: Taxpayers are on the hook for tens of billions of dollars used to keep giant financial firms such as American International Group (AIG, Fortune 500) afloat. Nobody knew the depths of AIG’s troubles when the government effectively took control in September 2008 because the risky financial trades – known as derivatives – that helped lead AIG astray were unregulated. Regulators also didn’t understand the extent to which all the financial firms were linked together through these contracts, when the financial system was collapsing.

The Senate bill is tougher than the House bill when it comes to ensuring these complex financial contracts are more transparent, pushing them onto clearinghouses and exchanges that can pinpoint the value of the securities. The House bill allows more leeway for financial firms to avoid exchanges and posting collateral on such contracts, especially if they’re not considered big derivatives dealers.

Spinning off swaps desks: The Senate bill bans banks from making derivative trades by forcing them to spin off their swaps desks. The idea is that banks that get access to emergency taxpayer-backed loans shouldn’t make risky bets. The House bill contains no such ban. The White House and House Financial Services Chairman Barney Frank have both signaled they may push to drop that provision in negotiations.

Debit card fees: Visa, Mastercard and all the banks are fighting a provision in the Senate bill cracking down on swipe fees that retailers pay when customers use debit cards. The fees comprise 1% to 3% of every transaction run through a debit or credit card, and go to cover the operational cost of transferring money from one account to another.

Network operators such as Visa (V, Fortune 500) skim off a fraction of the fee, while the rest goes to the financial firm that issued the card. The Senate directs the Federal Reserve to make debit card fees “reasonable and proportional” to costs. The Senate also allows retailers to give price cuts to customers who pay with debit cards that carry lower transaction fees.

Auto dealers: There’s a debate over whether auto dealers should escape increased oversight from a consumer financial protection regulator created by the Wall Street reform push. The House exempted auto dealers from increased oversight. The Senate bill keeps auto dealers subject to the consumer regulator, although a majority of the Senate took a nonbinding symbolic vote advising key negotiators to advocate exempting auto dealers. The White House opposes exemptions for auto dealers.

Bank capital requirements: Both bills require regulators to get tougher on the amount of capital that banks will have to keep as a cushion against losses. The Senate bill is tougher than the House, including a provision guiding regulators to develop new capital rules that are tougher on bank holding companies engaged in “risky” activities, such as derivatives and securitized products.

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Dealers Urge Congress to Keep Credit Affordable and Accessible with Finance Reform

WASHINGTON – The National Automobile Dealers Association (NADA) urges House and Senate conferees to keep finance options for car buyers affordable and accessible when considering legislation to overhaul the nation’s financial system.

“The House and Senate sent a very clear and bipartisan message that Main Street auto dealerships should not be in a Wall Street reform bill,” said David Regan, NADA vice president of legislative affairs.

During consideration of the Wall Street reform legislation, members of Congress voted to keep in place the sound regulatory structure that has allowed millions of consumers to buy new vehicles at competitive interest rates instead of creating an uncertain regulatory regime under a new agency.

Late last year, a strong bipartisan majority in the House Financial Services Committee voted 47-21 to support an auto dealer amendment, sponsored by Rep. John Campbell, R-Calif, which seeks to keep dealer-assisted financing a competitive option for auto shoppers. The amendment was retained in the final House bill.

On May 24, the Senate, by an overwhelming bipartisan margin (60-30), voted to support a “motion to instruct the conferees” offered by Sen. Sam Brownback, R-Kan., to keep the auto dealer language in the conference report.

“Auto dealerships are not banks. Dealers help consumers find affordable credit by arranging financing through a network of third-party lenders,” Regan said. “Dealerships do not underwrite, fund or service auto loans or leases and those that do will be subject to the new agency’s regulations, even under the Brownback/Campbell auto dealer language.”

Regan further emphasized that the new consumer agency proposed in the bill would have direct federal oversight over all auto loans. All banks, finance companies, credit unions and, dealerships that directly fund and service auto loans would also be regulated.

Regan said that false allegations by various groups were an attempt to confuse lawmakers, but many in Congress realized that the claims are without merit. For instance, baseless claims regarding dealer practices toward the military were dismissed because no data exists to back up the claims. In fact, when the Department of Defense presented a comprehensive report on predatory lending directed at the military in 2006, the report did not specifically identify dealer-assisted financing as a problem, instead focusing on payday loans, auto title lending, and refund anticipation loans. Click here for the report.

Similarly false claims alleging discriminatory practices also did not withstand scrutiny. A study cited by opponents failed to factor in an individual’s creditworthiness when determining a loan’s interest rate.

Congress also recognized that the Brownback/Campbell auto dealer language preserves all existing state and federal consumer protection statutes and regulations that govern dealer-assisted financing. Dealers’ retail financing activity would continue to be effectively regulated by the Federal Reserve Board and the Federal Trade Commission.

Regan urged the bill’s conferees to remember that dealer-assisted financing is optional for car buyers and provides more convenience, more competition and more choices for consumers. Dealers’ relationships with numerous lenders allow them to help consumers find more competitive financing. Often an automaker’s captive finance company enables dealers to provide 0 percent financing, which banks and credit unions do not offer.

“The vast majority of Congress looked at the facts and clearly saw that auto financing did not cause the financial crisis,” Regan said. Auto financing is sound because lenders must look primarily to the borrower for repayment, since financing is secured by a depreciating asset (the vehicle). Since 2004, 60-day auto loan delinquencies have never exceeded 1 percent, even during the worst of the recent recession.

“Consumers win when they have multiple financing options. Conferees must keep auto financing affordable for consumers from all walks of life by keeping competition in the marketplace,” Regan added.

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