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Brave New World

February 2011, F&I and Showroom - Feature

by Michael Benoit

You’d think dealers would have enough to worry about between accounting, insurance, personnel issues and simply being able to drive enough business into the showroom and service department to actually operate at a profit. Well, this year, you can add several new legal and compliance concerns to that list — and some may fundamentally change the way you operate.

If you weren’t aware, the Federal Trade Commission (FTC) was granted authority by the financial reform bill to write and implement rules identifying unfair and deceptive practices in the automobile business. So far, their first targets seemed to be dealer compensation and spot deliveries — two factors intrinsic to your profits.

Consumer advocates have been after dealer participation for as long as I can remember. They don’t like the idea of a dealer having the ability to negotiate a rate with the customer that is higher than the buy rate (i.e., the minimum rate at which the finance company will buy the paper). Of course, they never take into account that the customer pays the rate that he or she negotiated, and that he or she is legally obligated to pay that rate even if you never sell the paper to the finance company.

Instead, consumer advocates view your discretion to negotiate the rate as your license to discriminate against women and minorities. You may recall some cases in the late ’90s and early 2000s that focused on this issue. They all settled before trial. Interestingly, the settlement permitted dealers to continue to negotiate a higher rate. Was there really a problem? That depended on which expert witness you talked to.

Consumer advocates also detest spot deliveries, so much so that they made up a new name for it: “yo-yo” financing. You know, keep the customer on a string by letting him or her out of the store with a 12 percent rate when you know you’re going to yank him or her back in to re-contract at 18 percent.

Never mind that spot deliveries in most states are as legal as conditional delivery agreements, which inform customers of their obligation in the event a finance company will not buy the contract at the rate for which you originally contracted. No, they view it as just another way to screw your customer, because, of course, that’s good business.

What the consumer advocates don’t get is that many finance companies don’t operate on a 24/7 basis, which means you can’t submit an application at 10 p.m. on a Saturday night and expect to get a response before Monday. Sure, a lot of finance companies employ automated decisioning systems, but the deeper you go into the credit pool, the less likely that is.

Now tell me, is it good for business to tell a customer he or she can’t take their vehicle until Monday? Not really, right? In fact, it’s more likely you won’t see that customer again.

Expect efforts to make dealer participation and spot deliveries go away to increase. Hey, we could end up with some sort of flat fee compensation program that may not be terrible, but will likely eat into your revenue. As for spot deliveries, there are probably constitutional issues standing in the way of those efforts, but they’ll go there nonetheless.

However, a ray of sunshine found its way into the op-ed section of The Wall Street Journal in January. Apparently, President Obama has signed an executive order requiring federal agencies to review all of their rules and “weed out those that hurt job growth and creation.” The president said his executive order would “strike the right balance” between economic growth and regulations protecting the environment and public health and safety.

Sounds good, right? Guess again. The executive order doesn’t apply to independent agencies like the FTC and the new Consumer Financial Protection Bureau — the two agencies that regulate you. So pay attention, be on guard and be active. The FTC is holding town halls and roundtables around the country over the next several months. Find one near you and participate. Your regulators aren’t going away, and they need to hear how much this brave new world will really cost.

Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He is a frequent speaker and writer on a variety of consumer credit topics. He can be reached at michael.benoit@bobit.com. Nothing in this article is intended to be legal advice and should not be taken as such. Please direct all legal questions to your counsel.

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