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Senate, House financial overhaul bills go to conference committee

November 10, 2010

A committee of 12 senators will meet with House counterparts in the coming weeks to hammer out differences in the financial reform bills passed by each chamber. The conference is expected to move quickly, with the goal of getting a bill to President Obama’s desk by July 4.

An amendment to the House measure exempts dealers from oversight by a new government consumer-protection agency. A similar Senate amendment did not get a vote, but the chamber subsequently passed a nonbinding "sense of Congress" motion that urges Senate conferees to exempt dealers.

House conferees are expected to be announced after the Memorial Day holiday. Senate leaders on May 25 appointed seven Democrats—Christopher Dodd (Conn.), Blanche Lincoln (Ark.), Tim Johnson (S.D.), Charles Schumer (N.Y.), Tom Harkin (Iowa), Patrick Leahy (Vt.) and Jack Reed (R.I.)—and five Republicans—Richard Shelby ((Ala.), Judd Gregg (N.H.), Bob Corker (Tenn.), Saxby Chambliss (Ga.), and Michael Crapo (Idaho).

All five GOP senators voted against the financial reform bill, which passed the Senate 59-39 on May 20. But four of them supported the motion pressed by Sen. Sam Brownback to exempt most auto lending from new government oversight. Chambliss did not vote on the motion.

The conference will be led by House Financial Services Committee Chairman Barney Frank (D-Mass.). Frank was not a proponent of exempting dealers from the House bill, passed last December.

"I am not defending what we passed in the House," Frank told DealBook. "I lost on a couple of votes that, if we were doing them now with the public attention we are getting without health care, we would have won."

Frank reportedly favors the following Democrats for the committee: Luis Gutierrez (Ill.), Paul Kanjorski (Pa.), Maxine Waters (Calif.), Melvin Watt (N.C.), Gregory Meeks (N.Y.), Dennis Moore (Kan.), and Carolyn Maloney (N.Y.).

The oversight agency created by Congress would have authority to prohibit "unfair, deceptive or abusive practices." Dealers argue that those terms are ambiguous, which could lead to auto finance regulations that increase costs for dealers and consumers. The impact would be broad, considering that financing is involved in 94 percent of all auto purchases.

Also, auto dealers currently are regulated by a host of state and federal consumer protection rules that prohibit practices such as "bait and switch" lending and loans packed with undisclosed extras such as extended warranties.

The vast majority of dealers do not actually lend their own money to customers, but only arrange financing. That gives dealers an incentive to help their customers get affordable loans, said Bailey Wood, a spokesman for the National Automobile Dealers Association.

"As a dealer, I can sell you more car if your monthly rates are lower," Wood said.

Most economists agree that loans for homes, not autos, caused the financial meltdown experienced over the last two years. During the height of the housing bubble, Paul Ingrassia, author of "Comeback: The Fall and Rise of the American Automobile Industry," noted that GMAC — now Ally Bank — "was requiring higher standards for car loans than for the subprime and Alt-A home mortgages that it sold."

The NADA added that the default rate on auto loans has held steady for the last couple of years while home loan defaults have spiraled upward. It’s not as if auto loans aren’t regulated now.

A rarity in Washington, D.C., the Senate bill actually strengthened as debate continued and, broadly speaking, it is tougher on the financial industry than the 5-month-old House version. Congressional leaders also have agreed to permit television and Webcast coverage, and the C-SPAN cameras will complicate attempts to weaken the bill behind closed doors.

Dealer groups maintained that exempting dealers from the financial industry regulation is pro-consumer, because consumers otherwise would have fewer opportunities for affordable loans.