Regulating auto dealerships: a strange laxity in our state

For whatever reason, this state appears to be far too trusting of auto dealerships to police themselves. A state legislator points out some of the problems and offers a few suggested solutions.

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Cars for sale, consumers beware.

For whatever reason, this state appears to be far too trusting of auto dealerships to police themselves. A state legislator points out some of the problems and offers a few suggested solutions.

There are at least two interesting aspects to the Rob McKenna auto dealership-in kind donation story that rattled around the headlines recently. The first is the normal “he took money” and “she took money” political positioning from both sides. You can draw your own tactical conclusions about this. The second and more useful dialogue, however, is about the important public policy "systems" issue of the state of Washington’s consumer protection oversight of auto dealerships.

Last year, my business partner walked into an auto dealership and purchased a late model Mercedes Benz. When his title hadn’t arrived he learned that the dealer had not paid the original title holder of the vehicle and the retailer had left the country with my partners’ money and that of numerous other consumers. The Department of Licensing determined that title was due the consumer but, alas, the wholesaler intervened with an aggressive lawsuit to recapture his own lost money.

The story became a Kafka-esque assault upon common sense: The innocent consumer is left without money or title but a pile of legal bills, the state does absolutely nothing while the wholesaler files suit against the out-of-country dealer despite possessing business insurance against just such misdeeds.

The entire experience has educated me about the undercurrent between the wholesale and retail auto subculture in Washington. I learned that the default position needs to be strengthened substantially in the direction of protecting the consumer and not shielding the wholesale and retail businesses from one another at the consumers' expense. When the economy is strong, auto wholesalers and retailers play around with titles and ownership and sales support easily. In an era of reduced credit — our new reality — the house of cards comes crashing down and the consumer seems to be left in the cold.

Well before the political story about McKenna broke, I had begun discovering that this particular case proves our state provides weak consumer protection when a wholesale and retail relationship sours. I had also started the process of planning, researching, and crafting modernization legislation for the 2012 session.

The real issue raised by the recent coverage is not whether McKenna or Gov. Gregoire or Reagan Dunn or Bob Ferguson (in effect anyone who is or could eventually be Attorney General of the state of Washington) has received a donation from the auto dealer’s association. In fact I received a $250 donation in 2010 myself as have many other members of the Legislature. In 2009, my first year in Olympia, we faced a modest bill to allow auto dealerships the opportunity to charge an increased fee. Given that it didn’t seem to bring with it formal opposition I voted for the bill. Had I known then what I know today, I would have tacked on amendments to strengthen our consumer protection laws. (Another disclosure: I am an announced supporter of Bob Ferguson in the AG race.)

A core systems issue is whether the state provides strong consumer protections in dealing with auto dealerships and whether "bad apples" are weeded out through the regulatory process. The real point of contention is whether the level of political activism exhibited by auto dealers (or any special interest for that matter) materially changed the policies of our state to the detriment of the consumer. Has the attorney general, governor and the Legislature chosen to tread lightly in this area due to the strong financial and political relationships with auto dealerships? (It goes without saying that there are good and bad dealers just as in any industry and that the majority, I venture, are honest business people.)

The attorney general’s office receives 3.7 complaints per work day on average on auto sale issues over the past five years, according to the AG’s office. That number does not include those made to the Better Business Bureau, Department of Licensing, or apparently those with respect to a dealer going out of business. That's more than 1,000 a year from the AG’s office alone. About 3.6 percent deal with title issues such as failure to pay off a loan, a businesses unwilling to forward the paperwork, etc. Meanwhile, the Department of Licensing is down to a mere 10 auditors statewide due to budget cuts in a bad economy when consumer complaints become more dire.

I struggle to understand why general taxpayers should subsidize the critical oversight of an industry with such clear "externalities" negatively impacting consumers. Clearly a modest  fee charged to the auto-dealerships (not on consumers or taxpayers, and not passed through to consumers) to fund sufficient auditor services is responsible fiscal policy regardless of one’s party affiliation, so I hope to attract GOP support for this idea.

At present, the AG’s auto dealership oversight role is more important than ever. The state sees at least 450 auto dealerships go out of business each year and they are replaced by 450 new dealerships among a total of 2,297 dealers.

Many of them are, obviously, simply the same people changing business licenses and ownership. Many others are new to the business. Regardless, in this market, most of them face credit challenges given the severe credit market contraction for individuals and small businesses and the incidents of disputes will increase.

Strangely, the state requires an auto dealership to hold a mere $30,000 bond to be in business in Washington. That’s less than the value of one new vehicle. My recollection is that California by contrast requires a $250,000 bond. Equally troubling, Washington requires legal action to secure payment against the bond rather than a consumer complaint action and mediated resolution. Thus, the consumer needs a lawyer to challenge a bond even on a small or modest complaint. Most, of course, can’t afford the time or money of such an intervention and the auto dealer’s bond is left untouched.

Another problem with Washington’s regulation concerns seems to be the fact that dealers are able to deposit a consumers’ deposit or full payment in their normal operational bank account. There is no escrow such as occurs with a home purchase and sale agreement, and the interest accrues to the benefit of the dealer who is in no rush to pay off the note.

One of the more serious regulatory problems concerns "curbstoning," a practice that rightfully troubles the reputable auto dealerships as much as the state. This means, in effect, the people who purchase vehicles never transfer the titles into their name, thereby avoiding the sales tax and licensing requirements. Simply, it’s unlicensed dealer activity. Presently in the state you can sell up to four vehicles per year and not require a dealer’s license. A simple way around this is not to transfer the titles into your name. Not surprisingly Craigslist has made this opportunity to earn extra money very popular.

If you do transfer the titles into your name, it is based on a person and not a household, so technically: A husband sells four cars per year, his wife sells four cars per year, the 19-year-old son can sell four cars per year, the daughter that is 20 can sell four cars per year, of course all on paper, so out of this household, the unlicensed dealer could sell 16 vehicles a year in the state of Washington without having a dealer’s license and still be perfectly legal.

I don’t know where candidates Ferguson and Dunn stand on the regulation of the auto dealers; nor do I know where Rob McKenna and former Attorney General Gregoire stood before them. But I do know that it matters to real consumers struggling to deal with the complexities of a loosely regulated industry.

Our state clearly needs to modernize and update its weak consumer-protection laws relative to auto dealerships. For whatever reason, that hasn’t happened yet.

This article is adapted from a post in Rep. Carlyle's blog.


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