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A Difference of Opinion

August 2009, F&I and Showroom - Feature

by Michael Benoit

Last month, I wrote about HR 2309, a bill that would give the Federal Trade Commission broad new powers to regulate automobile dealers. Apparently, my column caught the attention of my good friends at the Center for Responsible Lending (CRL), who took issue with my comments on this bill. Who knew the consumer advocates read the trade rags? Well, the good ones always do.

In any event, there are always two sides to any story and this business always benefits from a little intellectual tug of war. That’s why I’ve invited the CRL’s Josh Frank and Delvin Davis to share the center’s views.

1. HR 2309 provides that the FTC must “consider” adopting rules that would restrict post-sale changes in financing terms.

MB: This proposal is directed at a perceived problem with spot deliveries, and I agree that some unscrupulous dealers may use this time-tested sales technique for nefarious purposes. But done correctly, spot deliveries provide a benefit to all parties. For dealers, it increases the likelihood of a sale. For customers in need of transportation, they can drive off the lot immediately.

Having drafted, or opined on, many a conditional sale agreement, I have some thoughts on how spot delivery transactions should be conducted. First, dealers should keep the customer’s trade until the financing closes. This allows the customer to take back his original vehicle if he does not wish to re-contract in the event the proposed financing doesn’t work out. Second, the dealer should return any deposit, less a reasonable and clearly disclosed fee for excess wear and use of the returned vehicle. Third, all disclosure should be simple, in writing and contractually binding, making it clear that the sale is contingent on the dealer finding a buyer for the paper, and that the customer will be required to return the vehicle if he or she can’t.

Sure, some data indicates that lower-income customers have been victimized by bad dealers. But no one yet has offered data that is, in my view, either objective or recent, and one can’t ignore the fact that many of these buyers have had favorable spot delivery experiences. No reputable dealer will risk his reputation to force a sale that is likely to cost him later; nor is he likely to object to regulating bad actors. But all dealers can be legitimately opposed to overreaching regulation.

JF/DD: First off, thank you for allowing us to share our perspectives on the dealer practices we’re discussing. The CRL recently conducted its own research on dealer reserve compensation, which I invite your readers to check out at www.responsiblelending.org.

In our view, the practice of yo-yo sales is designed to trap the buyer in a highly vulnerable position after the he or she takes the car home. Just when the consumer is both psychologically and economically invested in the new car, the seller threatens to reclaim the car and withhold the trade-in or down payment unless the buyer agrees to pay a much higher interest rate. That higher rate, in turn, provides for a larger dealer markup.

In fact, our survey found that people who had experienced a yo-yo sale had an interest rate that was 5 percent higher, even after accounting for differences in credit risk. The survey also revealed that yo-yo sales were more common among lower-income buyers. Of those who used dealer financing for their last vehicle purchase, one-in-eight buyers with an income of less than $40,000 and one-in-four with an income of less than $25,000 were victims of yo-yo sales. If consumers knew there was a possibility their terms would substantially increase, few would be so cavalier as to say: “I’ll buy this car now. You can tell me next week what it will cost.”

HR 2309 would give the FTC authority to regulate such practices. Should it pass, the task before the FTC will be to prohibit yo-yo sales while preserving mutually beneficial arrangements, as well as the ability of dealers to use spot-delivery sales when appropriate.

2. HR 2309 provides that the FTC must “consider” adopting rules that would limit the ability of dealers to receive compensation for arranging financing or assigning a credit contract based on the interest rate, the annual percentage rate, or the amount financed.

MB: The installment sale is the original form of consumer finance, and statutes regulating such financing are some of the oldest on the books. Markets for installment paper have been around for decades, and some state laws (Ohio, for instance) recognized the dealer’s right to mark up the customer’s rate as far back as 1949. Using the regulatory environment to limit dealer profits is a solution in search of a problem. The real problem, as I’m sure the CRL will admit, is that consumers lack an understanding of financial products and services.

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