WASHINGTON, D.C. — SubPrime Auto Finance News learned this week that buy-here, pay-here dealers throughout the nation are randomly being tapped by the Federal Trade Commission to provide copies of their contracts for the last year.

This move is a part of the FTC's effort to educate itself on how BHPH dealers are conducting business as it prepares to enforce the regulations that will be created under the Wall Street Reform legislation and the Consumer Protection Agency, according to the founder of the National Alliance of BHPH Dealers and a partner with Hudson Cook. 

While the agency has yet to be established, this board is expected to develop the rules and regulations that BHPH dealers must abide by. Meanwhile, the FTC will be charged with enforcing these new regulations.

Just before Thanksgiving, Ken Shilson, founder of NABD, revealed that a group of dealers met with FTC officials in an early attempt to educate Federal authorities to how these auto professionals conduct business.

According to Shilson, "It was a positive meeting, in the sense that they asked a number of questions and the dealer representatives presented general information on the BHPH industry and the purpose of BHPH. They explained how the industry provides transportation to otherwise unbankable people. It was more educational than anything else."

Federal authorities indicated they expect the Consumer Protection Agency board to be established in the near future and suggested to dealer representatives that they meet the board members once they are tapped and maintain an ongoing dialog with the group.

Not long after the meeting, the FTC apparently began randomly selecting dealers throughout the nation to conduct a "Holder in Due Course" investigation into these dealers.

While the letter sent by the FTC indicates that response is "voluntary," it also suggests that dealers respond or it could become mandatory, according to Shilson and Michael Goodman, a partner with Hudson Cook. While BHPH dealers are included in the investigation, so too, are other types of dealers, including franchised and independents, Goodman noted.

The FTC has requested dealers produce copies of all contracts from early October of last year through the present, Goodman pointed out. However, he explained to SubPrime Auto Finance News that government officials are looking at one narrow aspect of the contracts. They are looking to see how dealers are handling the "Holder in Due Course" disclosure, which for just about every dealer is required to be pre-printed on every contract.

Goodman indicated this is an older law that has been on the books for a while. He doesn't expect this investigation to cause a problem for dealers.

"If the FTC was intending a broad investigation of dealers, I believe it would ask broad questions," he highlighted.

While it's unknown how many dealers have been contacted by the FTC throughout the country, Goodman said he is representing six of these dealers.

"The FTC is asking for like 1,000 copies of contracts. We don't believe they need that many, so I talked to the FTC on behalf of each of my dealer clients and got them to agree to accept a sample size of 20 contracts from each instead of 1,000," Goodman explained.

He went on to say that this investigation has concerned dealers.

"I've talked to these dealers and this request is kind of stressful. Collecting every contract would take a huge amount of time and resources for dealers. The fact the FTC is letting us limit this to a sample size is very helpful," he continued.

He stressed that the FTC is not conducting this investigation in response to complaints or even evidence of non-compliance.

"It feels more like a checkup to me than an adversarial inquiry," Goodman suggested. "It's a narrow issue and I'm seeing compliance on every contract."

However, he noted that if a dealer is in compliance with the holder disclosure but has other problems or violations of other laws, the FTC could send a follow-up letter that it got the dealer's submission but sees another problem and wants to learn more.

"I wouldn't be surprised," Goodman said.

Basically, Goodman believes "the FTC is trying to educate itself on this particular issue (Holder in Due Course). They know it's been on the books for many years. Hopefully they'll be happy to see that dealers have this under control."

For dealers who received letters from the FTC, Goodman offered up three pieces of advice:

—"First, the FTC told me that this is a random survey of dealers nationwide and is not prompted by concerns by specific dealers or specific concerns about compliance with the "Hold in Due Course" issue. If you get this letter from the FTC, you don't have to worry that the FTC thinks you're doing anything wrong. Do not make this out to be more dangerous than it is," he stressed.

—Second, he recommended calling the FTC to get them to agree to narrow the investigation down to a sample size rather than having to produce every single contract over the last year.

—And finally, Goodman said, "I strongly discourage dealers from not responding to the FTC. Go ahead and respond. You might not like it, but I don't think ripping up the letter is a good idea."

Shilson seconded Goodman's suggestion that dealers respond and not throw the letter away. He stressed that dealers would more than likely prefer to have the opportunity to respond themselves rather than have the FTC show up on their lots and pore over their paperwork.

According to Shilson, this FTC investigation is just the beginning of what's to come as the Consumer Protection Agency is established and gets off the ground.

"The FTC and Consumer Protection Board are going to be working in tandem to make life very hard for BHPH operators and the alternative financial services industry," he told SubPrime Auto Finance News.

"My feeling is that we, the NABD, want to understand the steps we can take to bring some reason to this whole thing. We agree that having a code of conduct is needed. We also agree that a special set of rules for underwriting military personnel is good. However, we also believe we need a stronger voice in Washington to help them understand the alternative financial services industry," Shilson said.

"I think we need to draw on the knowledge of other folks who have worked on similar battles before. This will effect the biggest positive impact. We can't throw a bunch of money and lobby to get things to change. This, (the looming rules and regulations to be introduced by the Consumer Protection Agency) could definitely impact our industry more than the shortage of vehicles right now," he stressed.

Shilson noted that dealers contacted by the FTC were given 30 days to respond.