Michigan regulators are seeking to shut down what they describe as a loophole in auto dealer licensing law that could allow unscrupulous, out-of-state used car sellers to fleece consumers.

The threat from wholesale used vehicle dealers, who are authorized to buy and sell only from and to other licensed dealers, appears to be largely hypothetical to date. But it is based on experience in other states. In those cases, wholesale licensees, sometimes operating out of makeshift offices, allegedly engaged in deceptive practices, like selling damaged and reclaimed vehicles without notifying buyers.

Legislation in the Michigan Legislature introduced by Sen. Jeff Irwin, D-Ann Arbor, and Sen. Ruth Johnson, R-Holly, would require new applicants for a wholesale used vehicle dealer license to maintain a bonafide business location, retain business records on site and be open to the public at least 15 hours per week.

Irwin said the new regulations where requested by officials at the Secretary of State, which administers vehicle dealer licensing, because “lots of shady things can happen” under the “particularly lax rules” now in effect.

“One thing we want to make sure is that if something goes wrong (with a vehicle sale) you can find the business,” he said.

SOS officials were alarmed, Irwin said, when a national firm in 2018 appeared to be in the process of establishing a central site in Washtenaw County where multiple wholesale licensees with little or no connection to Michigan would be doing business.

The firm had previously operated in Indiana before that state abolished its wholesale used vehicle licensing regime altogether, Irwin said.

A search of Michigan corporate records indicated that the firm, US Dealer Licensing LLC, registered with the state in March 2018 and dissolved in September of that year.

Irwin acknowledged that the threat to consumers is largely prospective, but said the tightened regulations are necessary as more commerce moves online and new avenues for potential fraud open up.

Irwin said the goal of the legislation “is not to frustrate people that are doing legitimate business. We’re not trying to squeeze anybody.”

He noted that the proposed new restrictions would not apply to wholesale vehicle dealers who are currently licensed.

There are about 250 active wholesale vehicle sales licensees operating in Michigan, according to the Secretary of State.

Terry Burns, vice president of the Michigan Automobile Dealers Association, called them a “key component of the (auto sales) market.”

“All of the retailers use them” to locate and obtain quality used vehicles, he said.

But Michigan could be attractive to unscrupulous operators, Burns said, in part because the state has a reputation for running an efficient title procurement system. Someone could hypothetically game that system, he said, to obtain a clean title for a hurricane-damaged vehicle from another state.

The ultimate purchaser of the vehicle might have little recourse if the damage is later discovered and the wholesaler has little physical presence in Michigan, Burns said.

The MADA political action committee has been a generous contributor to legislative campaigns historically, and the association has been accused of pushing protectionist measures at the Capitol to thwart competitors. Burns said the association supports the Irwin-Johnson legislation but would receive no direct benefit from its adoption.

Jack McHugh, the senior legislative analyst at the Mackinac Center for Public Policy, has written in the past about efforts by the new car dealer lobby to enact laws that freeze out competitors. He said this legislation is not in the interest of consumers for a slightly different reason: “The bill appears to be an example of government regulators working with the regulated industry to maintain their tight control of this market.”

He pointed to a well known pattern in such matters, known as the “iron triangle.” “Regulators, the regulated industry and relevant legislative committees cooperate to protect industry players from competition — but consumers aren’t at that table,” he said. “If Uber had asked regulators and the taxi industry for permission before launching service in this state, similarly speculative ‘unscrupulous operators’ claims may well have been used to shut it down.”