HANOVER, Md. — Even as President Obama put his signature on the Wall Street Reform and Consumer Protection Act of 2010 Wednesday, the National Automotive Finance Association as well as two partners from well-known industry law firm Hudson Cook still remain quite uncertain about the depth of how this legislation is going to affect dealers and the auto finance market.

During a Webinar hosted by the NAF Association, Hudson Cook partners Michael Benoit and Thomas Buiteweg attempted to hone in on what elements contained within hundreds of pages of new legislation dealt most closely with dealers and captive and non-captive finance companies.

"We're going to be doing a lot of reading the tea leaves because in large measure the statute just establishes how big of a regulatory gorilla we're going to be dealing with over the next few years," Buiteweg conceded at the outset.

Early Assessment of CFPB Influence on Dealers, Finance Companies

The attorneys began their discussion by delving into the portion of the legislation that has gotten the most attention from the auto industry — the creation of the Consumer Financial Protection Bureau.

Buiteweg highlighted many regulatory facets the CFPB now has been granted, including enforcement of existing consumer financial protection laws and broad authority to create new rules for financial services.

"It encompasses virtually all of the financial products that we would think of," he stated.

While the National Automobile Dealers Association and other industry organizations fervently lobbied and pressed lawmakers to exclude dealerships from CFPB jurisdiction, Benoit believes buy-here, pay-here dealers could be directly in the crosshairs of its new regulations.

"As many of you know, the auto dealers were successful in their attempts to get an exclusion from the jurisdiction of the CFPB. But the exclusion only applies to certain dealers — those who either sell and service or lease and service, or both, motor vehicles and who routinely sell their paper to unrelated, unaffiliated third-party finance companies," Benoit explained.

"This is significant," he emphasized. "The requirement that there be a service function limits this exclusion to primarily franchise dealers and to other large independents that have a service function. How much of a service function you need to have is unclear. I'm suspecting we'll see a rule making on that."

Later in the Webinar, Benoit again reiterated how cloudy the definition of a dealership service department currently is within this new legislation.

"We're not quite sure what servicing means in terms of how expansive does the servicing function need to be. It's one thing to buy a toolbox with a couple of wrenches in it. It's another thing to be CarMax with a full service department," Benoit indicated.

The Hudson Cook partner went into more detail about why BHPH dealers could be so susceptible to heaps of rules created by the CFPB.

"As far as buy-here, pay-here dealers are concerned, they will not be able to avoid the jurisdiction of the CFPB by selling their paper to their own related finance company, which is the structure that many of them use," Benoit noted.

Even if any kind of dealer conducts business in ways that shield it from bureau jurisdiction, Benoit believes there is plenty of room for more rule making and other regulatory practices to be levied onto the industry. Benoit sees the agency coming down on the connections between dealers and finance companies.

"The price dealers paid was the Federal Trade Commission got expedited rule making authority to define unfair and deceptive practices of dealers," he insisted.

"It's possible they could define standard business practices that we are accustomed to these days as unfair and deceptive," Benoit went on to say. "It could be participating in the finance charge. It could the spot delivery. It could be the sale of certain products in conjunction with the sale of an automobile. There's no telling what could happen here.

"If anybody thinks they got a free pass on this, I think that's probably not the case," he declared.

What Buiteweg believes was the fuel for all of this suspicion came from a Senate Banking Committee report that apparently was used extensively as a reference point for act legislation.

"What comes out of this report is a clear lack of understanding about how third-party auto financing works; a clear thought process that says the rates the customer should get is the buy rate from the finance company and that the dealer has no business participating in any way in the finance charges," Buiteweg explained.

"Clearly this is on Congress' mind and likely will be on the CFPB's mind to go after the auto industry targeting these sorts of practices," he continued. "The industry will have its work cut out for it to educate the CFPB on how this really works and to try and dispel some of the unsupported allegations and disparaging remarks toward the auto finance business."

Should the aim of the CFPB also be to place more regulatory pressure on finance companies, Buiteweg offered a host of potential consequences, including:

—More substantive restrictions on compensating dealers and the types of products that can be included in contracts purchased.

—Based on the proposed mortgage reforms, more extensive verifications of applicants.

—Increased fair-lending testing and reporting requirements, and generally higher and more constant scrutiny of fair lending practices.

—Increased costs related to preparing and filing reports on regulatory compliance.

—Customer information rights likely to increase administrative burdens and risk association with resolving customer complaints.

Potential Affect of Act on Securitizations

Beyond the creation of the CFPB, Benoit and Buiteweg discussed how this reform act is constructed to direct the Securities and Exchange Commission to oversee new securitization restrictions. The Hudson Cook partners highlighted elements of new regulations the SEC now has been ordered to implement in connection with required retention of credit risk in ABS transactions.

—Retention Requirements of 5 Percent: Buiteweg noted the new rules would require retention of not less than 5 percent of the credit risk of the financial assets transferred in the transaction between the originator — the dealer in an indirect or three-party transaction — and the securitizer, which is generally the finance source.

—Permissible Forms of Retention and Minimum Duration: He pointed out rules would establish the permissible forms of risk retention and the minimum duration for it.

—Allocations of Retention Between the Parties: Buiteweg said new regulations would establish jointly with the federal banking agencies the allocation of risk between the originator and securitizer. He added risk retention allocated to the originator reduces that required of the securitizer.

—Exempt Classes of Assets: He further mentioned that rules would reduce risk retention requirements for certain classes of assets that meet underwriting criteria established by the federal banking agencies.

Consequently, Buiteweg insisted on some "virtual certainties" in terms of ramifications on finance companies. Specific ones he mentioned during the Webinar included additional difficulty to engage in ABS transactions and uncertainty if current first-loss retention provisions will be sufficient.

As a result, he thinks the industry will need to be diligent on educating the SEC and getting appropriate treatment for auto ABS transactions.

The implications being placed on dealers in this area is significant, too.

Buiteweg noted dealers might now be required to retain credit risk that is now transferred to finance sources. Furthermore, he stated dealers could face higher costs and less availability if finance sources find it more difficult to access low-cost ABS market for funding.

How Soon Could Reform Impact the Industry?

Both Benoit and Buiteweg hesitated to speculate about how quickly all of this reform could fall upon dealers and finance companies. They mentioned several timetables for various elements of rule making that ranged in spans from 12 to 18 months, depending on how quickly new departments and bureaucratic leaders are established.

With the Consumer Financial Protection Bureau being one of the most critical elements to the entire Wall Street Reform Act, the Hudson Cook partners shared what they've heard about who could oversee it. The name they mentioned was Elizabeth Warren, a Harvard University professor who they indicated was the architect of the CFPB for the lawmakers.

"Who it's going to be remains to be seen," Benoit conceded. "All of the political indications are doubtful that the President is going to appoint anyone before the Senate leaves for its August recess.

"You don't want your nominee out there subject to all kinds of pot shots when there's nothing you can do about it," he pointed out.

Buiteweg mentioned that no matter who oversees the CFPB, its capabilities should be enormous because of the amount of federal funding available. He indicated its budget will be at least 10 to 12 percent of the operating amount for the Federal Reserve Board, which actually will house this new bureau.

Buiteweg estimated, using the most recent figures available, that the CFPB will have at least $850 million in resources with the room to request more from Congress should it be necessary.

"These folks have a big war chest to play around with in order to effectuate their powers and duties," Buiteweg insisted. "What we have really is the functional equivalent of an independent agency notwithstanding that it's nested inside of the Federal Reserve Board."

Wrapping up their presentation, Benoit stressed that Buiteweg summed up best what the Wall Street Reform Act could mean to the auto industry.

"I would expect them to use maximum creativity to go after the things they want to go after," Buiteweg concluded.