In a joint letter issued May 20, four providers of biweekly payment services continued their defense of the product category after the National Automobile Dealers Association (NADA) warned dealers earlier this month that the Federal Trade Commission (FTC) is probing how F&I offices disclose the product’s benefits.
The letter was signed by David Engleman, CEO of Smart Payment Plan, Robert Steenbergh, CEO of U.S. Equity Advantage, Lynn Simmons, president of Economic Advantages Corp., Michael Hull, CEO of Equity 4 U Inc. It cautioned dealers not to overstate the benefits of biweekly payment services but said the NADA’s memo overlooked several benefits such products offer to customers.
“… while we agree that, as with any F&I product, dealers must ensure they accurately explain biweekly payment options to consumers and should not overstate the benefit, we also believe that by focusing on the potential interest savings, the NADA memo missed much of the true value of our services to consumers and raised undue alarm,” read the memo, in part.
The NADA issued its memo on May 8. It warned members that the FTC recently issued civil investigative demands to dealers in connection with the sales of biweekly payment products. The association also stated that the memo was issued in response to a number of questions and comments the NADA’s legal and regulatory affairs team has received from members regarding the product.
“If accurately presented to your customers, with full disclosure of the costs and optional nature of the product, such biweekly payment plans are not inherently ‘illegal’ or noncompliant with federal law,” the memo stated, in part. “As with any product or service, however, if presented to consumers improperly, or in a misleading fashion, dealers could face numerous compliance risks.”
Biweekly payment products generally provide a service to the F&I customer in which half of the monthly car payment is deducted from the customer’s bank account every two weeks and sent directly to the finance source on the borrower’s behalf. As a result, the borrower, in effect, prepays their auto loan or lease, causing overall interest charges to be reduced.
“However, because of the basic characteristics of automobile loans, the costs associated with such programs can easily exceed the potential benefits, and therefore such products can particularly susceptible to UDAP or similar claims,” the memo warned.
The NADA illustrated its point using a low interest rate auto loan in which the savings to the borrower amounted to $43.11 after fees associated with the biweekly service were paid. Providers didn’t question the association’s math when it comes to loans with low interest rates, but they did charge the author with failing to value the increased equity position of the vehicle when a biweekly service is used. They also claimed the calculation ignored the positive effect paying the vehicle loan off early and on time has on consumer credit scores.
“The primary benefits of our services, such as convenience, ease of budgeting, improved cash flow, faster loan payoff, reduced negative equity, eliminating late fees and the significant interest savings when consumers add additional loan payments were completely overlooked and not mentioned by the prior NADA memo,” the four providers stated in their letter, which was obtained by F&I and Showroom.
“The bottom line remains that dealership F&I personnel must be aware of the specifics of these or any other F&I products they sell, and must ensure that F&I staff are properly trained to accurately and adequately disclose all fees and costs and not to overstate the potential benefits.”
An FTC official declined to comment on the matter when reached by F&I and Showroom earlier this month. Insiders who asked not to be named said the agency’s probe is centered on a single provider, which the four executives seemed to confirm in their letter to the NADA.
“First, it is important to clarify that simply because the FTC has reportedly inquired into one biweekly payment company, that does not indicate any inherent problem with such services in general,” read the letter, in part.
The executives added: “All reputable biweekly and bill payment companies always have and will continue to insist on adequate disclosures to consumers, will continue to work with dealers to ensure that their F&I personnel fully and accurately describe our services, and we are certain that fully-informed consumers will continue to see the benefits in enrolling in a biweekly or bill payment program.”