Since it went live in July 2011, the Consumer Financial Protection Bureau (CFPB) has unified the F&I industry in defense of the indirect auto finance channel. But concerns about the bureau’s interest in F&I products have brought an issue that has long divided captive finance sources, dealers and F&I product providers to the forefront in four states.
Captives have leaned on a three-decade-old Federal Trade Commission (FTC) rule to explain why they’re selective when it comes to the F&I products they’ll advance on in retail finance transactions. But the CFPB’s activities in the consumer finance markets — where the agency is holding credit card companies, mortgage companies, banks and even auto finance sources responsible for their vendors’ actions — are giving them even more reason to say “No” to third-party aftermarket products.
State dealer associations in Florida, Mississippi, New York and Oklahoma aren’t waiting to see how the bureau will impact the way finance sources treat aftermarket offerings. They have successfully lobbied state lawmakers to pass measures that prohibit captives from pressuring dealers to sell only their F&I protections. The bills took effect on June 16 in New York and on July 1 in Florida and Mississippi, and enforcement of a similar ban will begin in Oklahoma this November.
But it wasn’t a complete victory for dealers. Contained in the bills passed in Mississippi and New York was a mandate that F&I offices must specifically disclose to customers whether or not they are purchasing F&I protections backed by their vehicle’s manufacturer. Mississippi Automobile Dealer Association (MADA) President Bill Lehman says the added provision seemed harmless enough during the legislative process, but since House Bill 581 took effect, several of the association’s members have reported that at least one finance source has issued a warning to dealers that it will not purchase contracts from dealerships if the disclosure isn’t made.
“They can do that because it’s kind of a ‘gotcha,’” Lehman says. “If you’re going to do business with them, you’re going to do it their way.”
In anticipation of the new provision, the MADA developed a one-sentence disclosure for its 140 members. Customers will be required to initial the disclosure, which signifies that they were advised — both verbally and in writing, as stipulated by the state’s Updated Mississippi Motor Vehicle Commission Act — that the products they are purchasing are not provided or supported by a manufacturer or distributor. In New York, the disclosure isn't mandated by the state, but a franchisor can require a dealer to make the disclosure in “a separate statement, acknowledged by the consumer,” according to the text of the bill.
“We still maintain the position that our dealers are describing orally what the customer is purchasing, and the customer is signing a document that has the name of the company whose program they are purchasing,” Lehman says. “We feel like the dealer has told the customer what they have. They may not have told the customer that it wasn’t the manufacturer’s [product], but it can’t be both. If you bought it, and you know what it is, then you are supposed to know it’s not something else.”
The language in both the Mississippi and New York bills was developed, in part, by the Alliance of Automobile Manufacturers. Daniel Gage, a spokesperson for the association, says manufacturers were simply looking for “some level of protection” when a dealer sells a third-party product.
“When you’re in the back room or the finance office of a dealership filling out all that paperwork, we just want to make sure people understand that if you’re buying a Ford and an extended service contract that’s not a Ford extended service contract … you understand that [it’s not a Ford product],” he says.
But in Florida, where the provision is noticeably absent, Florida Automobile Dealers Association (FADA) President Ted Smith says such a disclosure is merely an attempt by the manufacturer to make customers feel as if they are getting an inferior product when they purchase something from a third-party provider.
“We already have a Florida Deceptive and Unfair Trade Practices Act that deals with how dealers sell products and what they disclose and don’t disclose,” Smith says. “If you throw [that disclosure piece] in there, now my dealer has to tell the consumer that the product is something different, when in fact it is of like kind, scope and quality.
“In today’s litigious climate in Florida, further disclosures that lack true consumer protection can lead to unintended omissions and dealer class actions brought by aggressive trial lawyers.”
A Delicate Balance
The American Financial Services Association (AFSA), which has represented the auto finance industry in discussions with the CFPB, came out against the dealer-protection bills in a February white paper. Issued to lawmakers, it warned that limiting the influence finance sources have on which F&I products are presented to consumers could upset the delicate relationship between manufacturers, financial institutions and dealers.
“… It is important that legislators not compromise a financial institution’s ability to choose not to finance products from third-party providers they do not know or trust,” the white paper states, in part. “A financial institution can end up as the holder in due course of a third-party provider’s obligations, and therefore has an interest in making sure the provider is financially viable to avoid responsibility for the obligations of that provider to a consumer if the provider should go out of business.”
Published by the FTC in May 1976, the Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses, also known as the Holder’s Rule, says a finance source that accepts assignment of an installment sales contract from a dealer can be held responsible if a customer who purchased ancillary products takes legal action. But David Robertson, executive director of the Association of Finance and Insurance Professionals, says that while a finance source’s obligations under this rule are often offered as justification for limiting which products are funded in retail installment sales contracts, the excuse no longer applies to today’s aftermarket F&I industry.
Robertson recalls a conversation he once had with a finance executive who shared that his organization was forced to pay about $2 million in a single year for nonperforming GAP policies. “What wasn’t divulged was whether this amount was a typical annual outlay or at what point in time it occurred,” Robertson says. “Granted, contingent liability is a consideration. However, the captive and institutional lenders have always had the ability to impose certain underwriting standards and covenant provisions on the aftermarket products they fund.”
There are other reasons captive finance companies encourage dealers to promote OEM-branded F&I protections. Loyalty programs that reward dealers the more they use a captive’s products and services are typically linked to how well a dealership sells its F&I products, among other factors. Incentives can range from bonuses per contract sold to rate reductions on floorplan and capital loans. And these rewards can be beneficial during down months or when a dealer wants to expand his or her operation.
“We think that these [incentive programs] bring a real advantage to dealers,” says Danielle Fagre Arlowe, the AFSA’s senior vice president. “But the decision to do business with that financial institution or any financial institution is at the dealer’s discretion. And competition in vehicle financing is absolutely fierce.”
The member complaints that fueled the FADA’s pursuit of added dealer protections — including claims that some captive programs charge dealers a fee for selling noncaptive F&I products — say otherwise. “We sure like freedom of choice when we offer consumers our third-party products and that’s being overtly threatened by a few factories,” Smith says.
The language in Florida House Bill 783 prohibits finance companies affiliated with a manufacturer or wholesale distributor from refusing to purchase a vehicle service contract from a dealer. It also prohibits the charging of an additional fee if a dealer sells a third-party product that is similar in scope and quality to the products offered by the finance source.
Smith says the FADA also tried to get a provision passed that would prevent finance sources from offering better finance terms to customers for choosing their products. But he says legislators were less comfortable with the more “gray aspects” that involved credit terms wrapped around the purchase of products. “Some policy makers have had a hard time grasping the significance of the monetary influence the manufacturer has in all three sales arenas — the vehicle, the automotive-related products and the financing,” he adds.
Mississippi’s law has specific language prohibiting manufacturers, distributors and wholesalers from “coercing” a dealer into making business changes that could be harmful to the dealer. The MADA’s Lehman cites expensive facility upgrades as an example of this, but the law also applies to ancillary products. “Everybody is full of good intentions, but a lot of times the dealers don’t think that some of the things that the manufacturers are requiring are reasonable or necessary,” he says.
Under Mississippi’s new law, manufacturers are also prohibited from having provisions in their franchise agreements that allow them to include F&I product sales as a measure of dealer performance in their loyalty programs. It also prohibits OEMs from requiring dealers to actively promote manufacturer-backed products.
But as is the case in Florida and New York, manufacturers and their captives are still able to provide incentive programs to Mississippi dealers who choose to sell their products.
The dealer-protection bills in Florida, Mississippi and New York took effect just as rumors began to circulate that the CFPB was beginning to turn its attention toward F&I products. The reports were the focus of a webinar hosted by RouteOne in late July. But it’s anyone’s guess as to how the bureau will proceed.
The notoriously tight-lipped agency has frustrated organizations like the National Automobile Dealers Association (NADA) for not laying out what it expects from dealers and auto finance sources operating in the indirect channel. Terry O’Loughlin, who spent 16 years in the Florida attorney general’s office before joining Reynolds and Reynolds Co. as it director of compliance, said there’s a reason for the bureau’s lack of transparency during F&I and Showroom’s annual conference last September.
“If you’re not sure how to react and behave, then you might overcompensate,” O’Loughlin said. “For agencies, that’s a great result, because it makes you that much more careful.”
Insiders say that uncertainty has given finance sources another reason to be careful about the F&I products they’ll advance on in finance transactions. There’s also the CFPB’s first public action in the auto finance arena in June 2013. It ordered US Bank and its nonbanking partner, Dealers’ Financial Services (DFS), to return $6.5 million to servicemembers for failing to properly disclose fees associated with their direct-to-consumer, Military Installment Loan and Educational Service Program. DFS also was charged with misrepresenting in its marketing materials the true cost and coverage of the program’s add-on service contract and GAP products.
The CFPB has also penalized several banks and credit card companies for the methods their vendors employ to sell add-on products and services — the most recent being GE Capital’s credit card division. Those actions forced F&I product providers to review their marketing materials.
Questions remain, however, about whether the bureau has jurisdiction over F&I product sales. Hudson Cook LLP partner Nikki Munro, who joined O’Loughlin on the panel at last year’s conference, said she didn’t think it did. “There’s a lot of gray area there,” she said. “With aftermarket products that are financial in nature — and the easiest one to refer to is GAP — we think the CFPB can exercise jurisdiction over those types of products because they are related to the extension of credit; they pay off the extension of credit if there’s a total loss.
“With nonfinancial products like vehicle service contracts, tire-and-wheel, paintless dent repair … we’re just not sure. The CFPB will probably take the position that those types of products offered in connection with the extension of credit gives it jurisdiction.”
The FADA’s Smith, however, says there’s a more obvious reason for the recent legislative battle in his state. “I believe what’s motivating this are the hundreds of millions of dollars that are represented by dealers and aftermarket sales of automotive-related products,” he says. “I mean, it’s huge dollars to be made. If I was a manufacturer, I would want to get as intimately involved in that area as I could.”
The Alliance of Automobile Manufacturers’ Gage admits as much. “Selling cars is a very competitive market,” he says. “So we see manufacturers trying to influence and advance as best they can, recognizing that we go through a franchise dealer network.
“We have to sell our product through independent separate businesses,” he continues. “We just want adequate and fair input into how the products that we make are marketed and displayed and sold. And so it’s a challenge, because rules are different in all 50 states as to what can and can’t be done and how we have to deal with our franchise networks ... And so we’re not asking for control, we just want to be part of that process.”
The MADA’s Lehman says that he doesn’t foresee the struggle between dealers, captives and manufacturers ending anytime soon. “Relationships between car dealers and manufacturers are love-hate relationships,” he says. “But neither one can do without the other.”