This appears to signal that the "disparate impact" rate participation cases are winding down and the CFPB, along with the Federal Trade Commission (FTC) and State Attorneys General (AGs) are looking at new ways to go after dealer revenues. And at the top of the list appear to be actions against dealers for unfair, deceptive, and abusive practices involved in selling aftermarket products. This is an area where the CFPB has won collectively millions of dollars from credit card issuers for alleged unfair, deceptive and abusive selling of credit card add-on products. Now that is moving to auto finance.
Unfair and deceptive practices have been prohibited by Section 5 of the FTC Act for many years and the standards are very vague. A practice is "unfair" if it causes, or is likely to cause, substantial injury to consumers and there are no countervailing benefits. It is the FTC's call whether a practice is likely to cause substantial injury even if no one is harmed and no one complains. A "deceptive" practice is one that misleads or is likely to mislead a consumer and, again, the FTC makes that judgment even if no one is mislead or claims to be. The Dodd-Frank Act gave the CFPB authority to prohibit "abusive" practices which the FTC considers to be a subset of unfair practices. Abusive practices are practices that materially interfere with a consumer's understanding of a financial product or service or take advantage of that misunderstanding. Abusive practices also cover the inability of a consumer to protect their interests or a practice which takes advantage of the customer's reasonable reliance on a dealer to act in their best interests. This also is in the discretion of the agency. Collectively, we will call these UDAAP practices.
Over the past several years, the CFPB, FTC, and Attorneys General have used the vague standards for standards for UDAAP practices to "regulate by enforcement." Instead of publishing proposed regulations, taking public comments, and then issuing final regulations, the agency will bring an action against a dealer claiming a UDAAP violation even if no law, regulation, or case decision prohibits the practice. An example occurred in 2015 when the FTC alleged that dealers advertising they would pay off a customer's trade-in balance was an unfair and deceptive practice and slapped 20-year consent decrees on five dealers. No prior authority had ever ruled such advertising was unlawful. But now that enforcement decree becomes the standard for other dealers. CFPB Director Richard Cordray called it "compliance malpractice" for other similarly-situated companies not to follow enforcement orders in their own businesses, hence the term "regulation by enforcement."
The CFPB ,FTC and State Attorneys General (AGs) have been regulating by enforcement in the aftermarket product sales area. Last year, the CFPB imposed a $700,000 reimbursement obligation and fine against a buy-here-pay-here dealer. The CFPB claimed that the dealer required credit customers to purchase an automobile repair policy and a GPS payment device costing $1,650 and $100 respectively, but did not include these costs in the contract disclosures. According to the CFPB, the dealer “took unreasonable advantage of this by exploiting its customers’ misunderstanding of the credit and sales terms for its own financial benefit.”
The CFPB has expressed its disdain for aftermarket products. "[T]he Bureau has found or alleged that some companies offering ancillary products failed to accurately describe those products, [and] offered products that provided little or no benefit to consumers without disclosing this fact. . ." The agency has warned consumers that "the sales tactics may be high-pressure and confusing [and] the benefits you receive from the product may not match the benefits that you thought you were offered."
The FTC has also brought actions for alleged UDAAPs in aftermarket product selling. As part of Operation Ruse Control in 2015, it entered into a consent decree with an auto dealer (as well as another consent decree with the product provider) for selling customers a product allegedly designed to reduce their finance charge obligations over the life of their credit agreement by making half a payment every two weeks instead of one payment at month end. Apparently, the cost to sign up for the program ($775) was determined by the FTC to be more than the savings consumers could expect to receive on a typical 60-month term.
In September 2016, the FTC sued a dealer in California charging the dealership packed extra, unauthorized charges for add-on products and services into consumer financing agreements. The dealer included products like extended service contracts, GAP, and maintenance or service plans charging some consumers for the products without their consent and falsely claiming to others that the products were required or were free.
The New York Attorney General has collected over $17 million in fines and reimbursement obligations from dealers since 2015 over credit repair and identity theft products offered by a provider that the AG put out of business. The AG also precluded the vendor's principals from ever participating in the "credit services" business again.
What's a Dealer to Do
In this environment, you should review all your aftermarket product offerings and be sure you can demonstrate to a regulator that each of them provides "value" to customers at the prices charged. Extended service products should be capable of being defended given that modern vehicles are composed of many complex and computerized systems that cannot be replaced with a wrench and shop tools. Whole systems need to be replaced and they can be expensive. Vehicle etch systems, which regulators have cited, may be more difficult to defend. A suit is pending in West Virginia challenging the value of etch as a theft deterrent device.
In selling products, make sure your processes are transparent and explain the products in simple English as the average U.S. consumer reads at between a seventh and ninth grade level. Make sure the consumer understands what the product does and does not cover and its cost, not just its effect on a monthly payment.
Never "payment pack" an aftermarket product into a pre-agreed monthly payment for the vehicle financing with the customer. All aftermarket products are optional and packing them into a monthly payment that has already been agreed upon but has "room" above the rate participation limit is an unfair and deceptive practice under federal and state law.
A menu system, in which each product is explained with its price noted and its effect on the customer's monthly payment, is another best practice. Do this for individual products as well as for packages (gold, silver, or bronze). Transparency to the customer is critical.
The CFPB has made noises about wanting to bring "disparate impact" credit discrimination claims based on different aftermarket prices and credit terms charged to protected classes of persons (women and minorities principally). It is a best practice to charge the same price for each product to each customer on a given vehicle. As with rate participation, if you lower the price for one customer, but not another, is a best practice to keep a document in the deal jacket explaining the legitimate business reason why you did so. Periodic sales by the product providers, a customer's documentation of being unable to afford the list price, dealership employee pricing promotions or meeting or beating a competitor's price may be examples. Review these with your attorney or compliance advisor who can suggest legitimate business reasons and the best way to document downward deviations in your file.
Do "due diligence" on your service providers as well. Do they have a record of being frequently sued or a negative rating with organizations like the Better Business Bureau? Ask them to explain. Do they have the financial resources to stand behind their product? If you or your captive are not the primary provider, you are putting your name on someone else's product and effectively assuming liability for it (check their contract for liability limitations and the like). Not something you want to go into without understanding the risks. Check out their training materials as well and make sure they capture the transparent selling system that you want to incorporate into your dealership.
Finally, make sure your dealership has a customer complaint process that is heavily weighted in favor of the customer. You don't want a customer filing a complaint with the CFPB, FTC or Attorney General over a several hundred dollar aftermarket product. Don't be penny wise and pound foolish.
Aftermarket product selling may be the "next big thing" for federal and state regulators. Make sure you can defend your products, your practices, and regularly train your f&i employees. Doing so may keep you out of the active enforcement in this area. Take the time to do it.
Randy Henrick is an auto dealer compliance expert who offers compliance consulting services to dealers at www.AutoDealerCompliance.net. Randy served for 12 years as Dealertrack's lead regulatory and compliance attorney and wrote all of Dealertrack's Compliance Guides. He presented workshops at the last three NADA national conventions, speaks to dealer associations, and prepares training and other compliance materials for dealers. Because of the general nature of this article, it is not intended as legal or compliance advice to any person but raises issues you may want to discuss with your attorney or compliance professional.