In August 2012, Direct Connect Auto Transport owner, John Costelac, sat down for a Q&A session to shed some light on upcoming auto transport developments.
Auto Transport Broker Bonds & Recent Legislation
Q: First, some background on what Direct Connect Auto Transport does. Your company is an auto transport broker?
We are authorized auto transport brokers and carriers, meaning we both assign the shipment of customers' vehicles as well as move vehicles on our own trucks on the routes we run.
Q: For those who don't know, please clarify that as the hierarchy goes, shippers take on the jobs, contact the freight brokers, then sell the job to the motor carrier, which makes the delivery. If you're an independent owner-operator, do you mostly rely on brokers?
Yes. Most carriers have 1-3 man teams, with 1-2 trucks in their fleet, and they don't focus on the marketing or logistics side of the business. Our job is to focus more on the logistics side and the back-end office, billing type of stuff. The drivers are just looking for a source that can load them constantly. Over 50% of shippers & motor carriers rely on brokers to keep their trucks filled with valuable deliveries.
A bit about Your History
Q: How did you get started in this field?
I started back when I was 18 years old, working for a small company in Fort Lauderdale, called Brothers Auto Transport. We grew the fleet from 2 trucks to 42 trucks over the next 10 years. Then, in 2002, I went into business for myself.
Q: Was Brothers Auto Transport a broker?
No, strictly a carrier.
Q: Direct Connect Auto Transport has a fleet of vehicles, and also outside operators that you assign freight to as needed? How does that work, is it an exclusive thing?
Yes, we have a network of drivers that are leased on to Direct Connect, they're contract carriers. That's the way we set it up, we have exclusivity with a particular carrier that runs that particular route.
Q: Is it a matter of logistics or competition?
Just control, this gives you more control over the freight and timing.
Recent Changes in Auto Transport Related Legislation
Q: Lets talk about the recent legislation passed as part of the American Energy and Infrastructure Jobs Act of 2012. In section 6206, the legislation increases the auto transport brokers bond to $75,000 and authorizes and requires the Secretary of Transportation to review a broker’s performance every 5 years and determine if their bond is sufficient to provide adequate financial security.
Basically, the law, which goes active in October 1, 2013, requires the bonds to go up, and gives discretion for the Transport Secretary to review and possibly raise the amount. The Secretary will have the most discretion in this case?
Correct, they're going to grant you five years with no review, but every five years they're going to review your status and if you have any of the markers associated with running an unethical practice—they will review your authority and make a decision to renew your broker authority at that time.
Q: Can they raise the bond in individual cases, for a single broker?
No, it goes up for everyone.
Q: The law makes no distinction between large and small brokers – or a brokerage that may do 100.000 in revenue or a brokerage that will exceed 5 million a year. What are your thoughts about this?This bill has been introduced many times times going back as far as the 1980's as a stand a lone bill and could never get passed. This new bill was incorporated with a much larger bill and basically went un flagged at the time. This will have a ripple effect through the brokerage industry. Some will be to withstand the new requirements and some will not.
Q: Does a brokerage company have to fully fund the the bond?
No. not at all. Every insurance company has different plans that are costumed tailored to fit the companies profile.
Q: Could you tell me who pushed for this measure?
It was TIA – the Transportation Intermediaries Association, and OOIDA which is the Owner-Operator Independent Drivers Association. The OOIDA is an organization where most of your mom-and-pop small carriers are members, and even big auto transport companies support them. This was due to a large amount of fraud that was going on in the freight forwarding and brokering industry.
Q: What Type of fraud?
There has been some brokers that the sole intent to create a brokerage was to deceive the carriers and make no payments the them. Please remember this is just a handful of brokers with this intent but the effects are felt all through the industry.
Q: So it was the carriers that got hit?
Yes. The bond is designed to protect the carrier, not the consumer.
Q: When a carrier gets ripped off by a broker, how do they get their money back?
The first thing they have to do is file a claim with the bond company and hope that the the bond still has enough left towards the 10,000. This is why they lobbied for the increase to give more protection to the carriers.
Q: Will the new bond requirements hurt the industry?
It will only hurt the ones that cant sustain the amount of business they do to offset the expense of the new bond.
Q: For carriers, the rationale behind the higher bond is clear. Was there push-back from brokers on the new law? Is there an alternative solution to raising bond amounts?
No, there won't be an alternative solution. There was talk that existing brokers were going to be grandfathered in, but they're not. Everyone has to get compliant by October 1, 2013.
Q: The law said there was a four-year period to comply.
This is where it's all wishy-washy... I don't think you have a four-year period, because the law says October 1st of 2013. I've talked to Nancy O'Liddy of TIA about this, and she mentioned that nobody's going to get grandfathered in, and by 2013, everyone's bond has to be in place, in the amount of $75,000.
Q: So if everyone has to comply within a year, it's going to set off a scramble, where everyone seeks the bond money. What is going to be the consequence of that? Who provides this money, is it ordinary banks or special lenders?
You get the money from surety companies, the major one is Pacific Financial out in Arizona. However, you can secure your own bond. What you would have to do is go to your bank and get an irrevocable letter of credit or trust in the amount of $75,000, the bank will hold the money in escrow on your side. They give you a letter, and you present it to your insurance company and they will wright the bind for a small fee.
Q: Do you think that this new measure will benefit the surety companies?
No, this will hurt them a little bit too, they are being brought under a higher standard under this law as well. As of right now, the surety companies can just file with FMCSA electronically, stating that they're backing the broker and that they're going to fund the trust, and they just hold that there are no claims.
They have a claims center, where, if a carrier starts to exceed two or three claims in a given time, they'll suspend them or cancel their bond, to minimize their risk.
Q: Who brings these claims, clients or carriers?
Just carriers. They file a claim with your bond company, your surety company.
This way of doing things won't change after the law, but there's going to be a bit more accountability on the sureties' part, the way they have to submit the bond, and how much money has to be in house to write that bond, and also, collateralizing it, as far as having the owner of the company be a signed personal guarantor. That wasn't common practice, and now it's going to be. Also, attaching some sort of property to the bond, so that the surety company has a way of recouping any losses that may occur.
Q: Is this going to cause more claims to be tied up with surety companies themselves?
That I don't know. Even our surety company is a little taken aback right now, until the law actually goes into a place where it's written into the Federal statutes. Once it's submitted, they're going to be able to determine how it's going to be handled, but I think they're still a little up in the air about how it's supposed to take place, and the formalities of it.
Q: Is this going to cause an increase in the margins that the broker charges, in order to stay in business?
No. I don't see this happening at this time.
Q: Do you expect this new law to be repealed?
I have heard of that being a possibility. However I think its very unlikely
Q: Would you do anything differently? Do you support the measure? Would you set the bond at $75,000, or some other number?
No, this is definitely the way I would do it. The number one thing is, TIA and OOIDA were shooting for $100,000. There was talk years ago – ten years ago – that they were shooting for $250,000-500,000. Congress didn't even want to mess with this. This was introduced as part of the "Moving Ahead for Progress Act" – MAP-21.
The big thing is that, between TIA, OOIDA and Congress, they came up with this number - $75,000. What it's designed to do is give FMCSA a bit more clarity, and the ability to suspend someone's license not just for not being funded on the bond, but for any ill-will actions that are going on under them – any excessive complaints, or any traces of fraud coming from the broker, and the FMSCA will have the ability to suspend their license, even if their bond is funded.
I'm fine with this measure.
The thing I like about this bill is, it establishes a 3-year relevant experience or certified training requirement to obtain a license. They're not going to just let anybody come off the street and say "Hey, I wanna be an auto transport broker." You're going to have to prove that you have 3 years of relevant experience, and if you don't, you go through some sort of certified training program that I'm sure the TIA is going to offer.
Q: Is it known yet, what counts as "relevant experience"?
No, not yet. I'm sure it's going to be having worked with a previous broker before. You will have to have been in the business—they won't let anyone straight off the street get into this, which is what has happened a lot in the past 3-4 years.
People just randomly start up brokerage firms, because they don't have to fund the bond, and on top of that, all they have to do is get a license for 300 dollars, and a 10-dollar website. And then they're up and running.
Q: Would you say the internet is responsible for the current state of the industry?
Yes, exactly. With a lot of the load boards today, it's kind of taken it where a broker doesn't need to have any knowledge of the industry, any connections, or any leased-on drivers like we have, since they have the ability to dump off that freight through different online load boards.
Q: To double back a bit, you're talking about all the people who may not even be malicious, but simply don't know what they're doing – all the small brokers who don't have experience. What would you say does more damage to the industry – straight-up fraud, or just people who don't know what they're doing?
It's a combination, because you have people who have ill will, their main focus being to defraud their driver, their contract carrier. Then, there are some brokers whose intent is to defraud the driver AND the customer. We've seen everything in the last couple of years.
But the big thing is that a lot of brokers are quoting prices to the consumer that they want to hear, taking deposits and not shipping the vehicles, because they can't ship the vehicles, just for the fact that... it's a bait-and-switch kind of thing.
Q: Because they underbid the price?
Exactly, they give a low-ball price, with the intent of getting the deposit. They do enough of those in a month, they can scrape half a million dollars, and then just shut down, close their merchant account, and move under a different name. The new legislation stops that too.
Q: For someone who wants, in these uncertain times, to become an auto transport broker, what would you recommend?
The number one thing I would say, is to at least go work for a company for 3 years--which is going to be part of the new legislation anyway. Or go get some sort of comparable training.
Q: So would the more important thing here be your skill as a broker, or having connections in the field?
It's a little bit of both. It's true that it's important to make sure that the right driver carries the right freight. You don't want to put a Ferrari on an open carrier that doesn't have the equipment to support it, which seems to happen a lot in our industry with people who don't know what they're doing.
I think – not that this has anything to do with the interview – but I think the new legislation is why 1st Auto-Transport Directory sold to DealerTrack, because by October 1, 2013, they were going to lose some of their market share and subscribers. I'm guessing they were going to lose 20-25% of their subscribers, because most of their subscribers are brokers working from home, small scale operations run by 1-2 people.
Q: Who is 1st Auto-Transport Directory?
It's also known as Central Dispatch, JTtracker, and MoveCars.com. They sold everything – which was JTracker, and Central Dispatch, and they also sold the advertising directory, which was MoveCars.com to DealerTrack, a technology company that provides many types of dealer solutions that is headquartered in New York.
So like most things, auto transport is a detail oriented industry. Thanks for taking the time out to answer these questions.
Absolutely, the more helpful information out there the better!
Direct Connect Auto Transport Offers:
- Enclosed Auto Shipping
- Open Carrier Auto Transport
- Flat Bed Car Shipping