FTC Staff Comment to the Hon. Rick McConnell Concerning Indiana S.B. 396 to Prohibit Auto Brokering

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSIO~
CmCAGO R£GIONAL OFFICE
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COMMISSION 	AUTHORIZED...,1G1
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ClliOIIgo. IIIincis tolI03
1312135H'"
FGbruary 	22, 	1994
The Honorable Riok McConnell
Chairman, 	PUblic 	Policy, 	Ethics
and Veterans 	Affairs 	committee
House 	of Representatives
200 West Washington Street
Room 	100
Indianapolis, 	IN 	46204
Dear 	Chair-an McConnell:
The 	staff 	of the 	Federal 	Trade commission' 	offers 	this
comment 	on Senate 	Bill 	No. 	396. 	This bill 	would prohibit
enqaging 	in the business 	of acting as 	a 	broker to 	arrange 	sales
or 	leases 	of new cars 	and 	trucks. 	We believe that the bill's
prohibition of alternative methods of arranging 	new vehicle
transactions 	would 	likely red'.lce 	competition and deprive
consumers 	of 	savings 	that 	they 	could realize by using 	these
methods.
x. 	Interest 	and 	experie~o. of 	~h. Federal 	Trade commission.
The 	Federal 	Trade 	Commission 	is 	empowered 	to 	prevent 	unfair
methods 	of 	competition and unfair deceptive acts 	or practices 	in
or affecting 	commerce. 2 	Consistent with this 	statutory mandate,
the 	Commission and 	its 	staff work to 	identify restrictions 	that
hinder competition and 	increase costs without 	providing
countervailing benefits to consumers.
The 	commission has 	long been concerned about 	restrictions
imposed 	on 	retailing methods 	that 	can be 	beneficial 	to 	consumers.
In the 	retail 	automobile market 	in particular, 	the 	Commission has
1 These 	comments 	represent 	the views 	of 	the 	staff 	ot the
Chica~v Regional 	Office and the 	BureaU of 	Competition 	of 	the
Federal 	Trade 	commission, 	and do 	not 	necessarily 	represent 	the
views 	of the 	Commission or any 	individual 	Commissioners. 	Our
views 	on 	this 	bill were 	requested by ReprQceneativQs Jerry 	Bales
and Rolland Webber.
2 	15 U.S.C. 	§ 	41 ~ ~.

Bon. 	Rick McConnell
Page 	2
ruled that 	dealers 	in 	tbe 	DQtroit 	area"'unreasonably'restricted
competition by aqreeinq to 	limit 	their hours 	of 	operation. 3 	The
staff of 	the 	Commission bas 	pub 1 iShed:':economic 'research 	about
automobile markQtinq. 4 	'
The IiJtaff 	of the 	commission has:sUbmitte'd,comments 	to 	state
governmental 	bodies nationwide 	about:p±'oposals to 	restrict
competi4;. ion 	among 	automobile marketers::~, The staff 	has 	frequently
commented on proposals 	to prohibit brokerinq;or requlatQ 	otf-
premises 	sales, 	most 	recently 	in MissoUri,s 	california,' and
Wisconsin. 7 	Three 	comments were 	addressed: to, IjroPosals 	in
Illinois, 	including 	one 	to prohibit ht~kering. 	,And the 	staff
cOlllDlented. on a 	Michiqan bill, 	similar':to: S. B. 	396, 	that 	also
would 	have prohibited brokerinq.9" 	,
3 	Detroit Auto 	Dealers Ass'n, 	lric:;,';,"FTC'Dkt.NO;':9189
(February 	22,1989), 	atf/d 	in part 	aDd':;,rgarlded 	in part, 	955F.'2d
457 	(6th cir.), 	cart. 	denied, 	113 	s. ;,:ct." 46J. 	(1992) ; ,consent
agreement 	accepted 	for 	public commeri~":(January 24, 	1994).
4 ~ Robert 	P. 	Rogers, 	The 	Etteet::of. State Elltry Regulation
on Retail 	Automobile Markets, 	Federai:::'i'rade,Commission, 	Bureau 	of
Economics 	Statf Report 	(January 	19B6r~:The Report 	concluded that
state 	laws 	restricting 	the 	number 	of':automobile dealers ,in an
area were 	costly to 	consumers. 	'
5 Comment 	to 	Sen. 	J. 	B. 	Banks 	(April"6'~ ::1990),~
6 COmIDent 	to Sen. 	Quentin 	L. 	Kopp, (J'anuary,5,i990).
7 Comment 	to Wisccnsin Department',' o'f,' :Transportation
(November 	3, 	1~89).
a comment to 	Sen. 	Aldo A. 	DeAnqeUs: :'(Mar6h' ,2i;-1989) • 	The
bill 	would also have 	expanded dealer,:,):~:ieensinq.'provisions.
Another proposal, 	the 	subject 	or 	a 	comment to Gov. 	James R.
Thompson 	(september 	8, 	1989), 	would<h'ave:tightenedmarket 	area
restrictions 	on 	franchised 	dealerships_and extended those
restrictions 	to 	franchised 	auto 	service> centers,. 	Governor
Thompson amendatorily vetoed the 	proylsions,relatingto car
dealerships 	and 	automobile 	service cehters 	and ,vetoed 	the 	dealer
licensing bill. 	The 	staff 	also 	commented on a "bill 	to prohibit
car dealers 	trom holdinq 	sales 	outside their 	local 	markets.
Comment to Rep. 	Woods 	Bowman 	(April ;2'4,: 1987).,
9 	Comment to Sen. 	Dick P'Osthumus>(September 	29,' : 1988). 	For
other comments 	on 	state proposals 	c6licerning vehicle"sales, 	ill '
comments 	to 	Florida Sen. 	Gwen Margolis 	(March 	29, 	1988): 	South 	'
carolina Rep. 	David C. 	W~ldrop, Jr.:'{March ,21~,' 1988); 	California
Assemblyman Richard Katz 	(January 	29':;, 1'988) ,; 	and Texas 	Gov.
William P. 	Clements, 	Jr. 	(Ju,ne 	1, 	1987).

Hon. 	Rick McConnell
Page 	3
XX. 	Description of 8.B. 	3'6.
The bill would prohibit engaging 	in the business 	of 	acting
as 	a 	broker to 	arrange sales or leases 	of new motor vehicles.
The statutory definition of a 	broker, 	namely one who, 	although
neither a 	franchised dealer 	(or employ.e) 	nor the 	owner, 	receives
a 	tee 	or other consideration 	for 	arranqing a 	transaction
involvinq a 	Vehicle, 	would be expanded 	to 	include 	arranginq 	for
buying, 	leasing, 	and 	sale 	for 	resale.'o 	The bill 	would 	prohibit
enqaging 	in that business 	for 	new motor vehicles," 	subject to a
penalty 	ot 	$5000 	per vehicle. '2 	Other references 	to 	brokering
now 	in the 	law, 	which provide 	for 	licensing 	and 	regulating
brokers, 	would be deleted. 13
xxx. 	Eff.c~. 	of S.B. 	3".
The bill would prohibit the 	business 	of helping consumers,
for 	a 	tee, 	to 	arrange 	new vehicle purchases 	or 	leases. 	The
expansive definition of 	"broker" 	would also 	likely 	encompass, 	and
therefore prohibit, 	many ot 	the 	car sales 	activities 	now
sponsored by credit unions, 	buying clubs, 	and 	other
organizations. 	The bill 	apparently would 	prevQnt 	anyone 	except
dealers 	and 	owners 	(and 	actual 	prospective purchasers 	or 	lessors)
trom negotiating 	sales 	or 	leases 	of new 	cars 	and 	trucks. 	The
etfect would be to 	inhibit 	existing and potential 	competition 	in
new vehicle sales 	and 	leases.
A prospective buyer may now calIon several 	kinds 	of
assistance 	in 	identifying licensed dealers 	willing 	to 	sell 	at 	a
price the buyer 	is 	willing to pay. 	One 	source, 	which 	has 	been
growing over the 	last 	few 	years, 	is 	individual 	brokers 	and 	buying
services who 	offer 	consumers 	the 	service 	of 	arranging 	new 	car
transactions, 	usually 	for 	a 	set 	fee. 	These 	brokers may 	solicit
competitive bids 	from dealers 	for vehicles 	that meet 	their
customers' 	requirements. 	Thus, 	brokers 	can 	save 	consumers 	money
on the purchase 	or lease price, 	and they 	can 	also 	save them
"search 	costs," 	that 	is, 	the 	cost 	of time 	and 	effort 	spent 	on
haggling.
10 S.B. 	396, 	§1, 	to amend IC 	9-13-2-15.
" S.B. 	396, 	§5, 	to 	add 	Ie 	9-23-2-15.
12 S.B. 	396, 	§7, 	to add 	Ie 	9-23-6-10.
13 5.B. 	396, 	§§3, -4, 	6, 	and 	8, 	to 	amend IC 	9-22-2-1, 	IC 	9-
22-2-5, 	IC 	9-23-3-19, 	and 	Ie 	9-29-8-4.

Hon. 	Riak McConnell
Page 	4
Another 	source 	ot 	assistance 	is 	credit unions, 	which 	sponsor
automobile 	sales 	conducted 	through 	dealers. 	In 	such 	sales,
dealers 	make vehicles 	available to 	credit union members 	at
favorable 	prices. 	Credit unions 	encourage 	these 	sales 	to promote
opportunities 	to provide 	financing. 	Dealers may agree 	to
participate to 	attract potential 	customers and 	to 	ensure 	higher
sales volume, 	which 	in turn mal make 	it possible 	for 	the 	dealers
to 	ofter 	sUbstantial 	savings.' 	Consumers may 	benefit 	from
lower prices, 	easier shopping, 	and better 	financing 	arrangements.
Buying clubs 	and 	reterral 	services may also 	arrange 	to make
new 	cars 	available 	to 	consumers 	at discount 	prices. 	These
services, 	which generally charge 	an annual 	membership 	fee,
arrange new car transactions 	for 	their members 	at 	guaranteed
prices with participating dealers. 	As with the 	credit unions,
dealers may agree with buying clubs 	to 	offer cars 	to 	the 	club'S
members 	at 	reduced prices; 	in 	return, 	dealers 	gain 	access 	to
customers 	and perhaps 	increased volume. 	A survey ot 	six
automobile buying services by 	Changing Times magazine 	conclUded
that 	customers 	buying cars through these 	services would have
realized substantial 	savings 	on each purchase.'S
But S.B. 	396 	could eliminate these 	arrangements 	along with
the Vehicle 	brokerage business, 	because 	a 	credit union 	or buying
club might 	be 	illegally acting as 	a 	broker 	if 	it 	received
"valuable consideration" 	for 	its 	role. 	For credit unions, 	that
consideration 	could take 	the 	form 	of the 	interest paid 	on their
loans; 	for 	buying clubs, 	it could be 	the 	fees 	received 	from 	their
members. 	These groups may therefore be prohibited 	from 	arranging
new Vehicle 	transactions. 	Prohibiting 	"brokering" 	functions,
both by 	individual 	brokers 	and by organizations, 	could 	eliminate
services 	that 	benefit 	Indiana consumers by 	saving them money 	and
inconvenience.
l' 	credit union-sponsored sales may 	stimulate 	other business
tor 	dealerships, 	too. 	Special 	financing 	terms 	and 	rates ~ay be
offered 	for 	the 	sale, 	and 	credit union members may 	shop 	with pre-
approved 	financing 	terms. 	Moreover, 	these 	terms 	may 	be 	kept 	open
after 	the 	sale ends, 	so 	consumers may 	have 	the 	option 	to 	obtain 	a
car that was 	not 	available at the 	sale, 	still 	under 	the 	sale's
financing 	terms.
15 Taking 	the Hassle 	out of C"!;r-Buying, 	Changing Times, 	Aug.
1988, 	at 	37. 	See 	also Kiplinger's 	Personal 	Finance Magaz~ne,
Dec. 	1992; 	Car Buving 	for 	Those WhO Hate 	to Haggle, 	Business
Week, 	Aug. 	30, 	1993, 	at 	86,.

Hon. 	Rick McConnell
Page 	5
Finally, 	S.B. 	396 may dampen 	competition among car 	dealers.
Dealers 	can now compete with 	each 	other to 	otfer attractive
prices 	to 	credit unions 	and buying 	olubs. 	They may 	find
themselves 	bidding against 	each other 	for 	sales 	arranged by
brokers. 	But S.B. 	396 would prevent 	the 	dealers 	from 	engaging 	in
this 	kind 	of 	competition and make 	it easier 	for 	them 	to 	keep
their prices higher. 	It would also 	remove 	from 	the marketplace
participants whose 	greater knowledge 	and 	experience 	enables 	them
to help consumers 	arrange transactions 	at 	lower prices.
xv. 	Conclusion.
S.B. 	396 may 	reduce competition and 	increase what 	Indiana
consumers pay to buy 	or 	lease 	new vehicles. 	Prohibiting
brokerinq would eliminate sales 	techniques 	that may 	save 	Indiana
consumers 	substantial 	amounts 	of 	both money 	and time 	in new
vehicle 	transactions.
/si~~r~elY, (" 	\
~-~\?~\----c. 	steven Baker
Director