What industry experts have feared as the "next big thing" for auto dealer regulators is underway, an attack on sales of aftermarket products such as GAP, extended service contracts, theft protection, and other products. Both the Consumer Financial Protection Bureau ("CFPB") and the Federal Trade Commission ("FTC") have been looking closely at aftermarket product sales practices in the course of supervisory exams of lenders and dealers respectively. But New York Attorney General Eric T. Schneiderman ("the New York AG") is taking the first big shots.
Last year, the New York AG fined four dealers in Queens, NY a total of $14 million in fines and reimbursements for deceptive sales of credit repair and identity protection services. “New York consumers must beware," said the New York AG. "Car dealerships sometimes pad their pockets by charging for worthless after-sale items, which inflate the price of their car. These items are often ones that consumers don’t need, did not ask for and often are not even told about. Businesses need to make a profit to survive, but it’s illegal to do so by duping consumers.”
In April 2016, the New York AG was at it again obtaining settlements with four New York City Metropolitan Area dealers for $2.17 million in fines and reimbursements for payment packing aftermarket products in vehicle prices. These products included the same identity theft protection and credit repair products that the Queens dealers had sold but other more conventional aftermarket products were cited as well.
Payment packing, a practice in which these optional products are built into the price of the vehicle without disclosing they are optional, was specifically cited by the New York AG.
The Charged Violations
Typically, after working with a salesperson to choose a car, the consumer met with a Finance & Insurance Manager who would try to sell the consumer additional aftermarket products such as extended service contracts, key replacement services, a security system, credit repair services and identity theft protection services. Often, these aftermarket items added hundreds or thousands of dollars in hidden charges to the sale or lease price of a vehicle. The costs of these items were often bundled into the vehicle sale price and not separately itemized. The investigation showed that for some dealers consumers were totally unaware that they had received these services. In many other cases, consumers thought that the services were free. As a result, often unbeknownst to the consumer, the price of the car stated on purchase and lease documents was inflated by the amount of these aftermarket items.
The FTC has brought actions against dealers and aftermarket product providers for deceptive sales practices similar to those described above. The FTC fined one dealer $187,000 for such practices with respect to the sale of credit repair products.
Best Practices for Selling Aftermarket Products
With federal and state regulators focused on aftermarket product sales, here are some best practices you should consider in your sales of aftermarket products to your customers:
1. Be able to defend the value of each aftermarket product in relation to its price. For example, theft deterrent products can reduce a consumer's auto insurance premiums. Extended service contracts can protect against expensive repairs where computerized vehicle systems break down and need to be completely replaced. More vehicles than ever require an entire system replacement due to the need for vehicles to send operating communications. Fixing a vehicle with a wrench or socket is becoming largely a thing of the past. Credit repair services (for which you cannot collect up-front fees) and identity theft protection are more difficult to defend on value.
2. Be honest and transparent in selling aftermarket products. One good way to do this is to use an electronic menu system that breaks down each product and product group (gold, silver, platinum) by its cost and effect on the consumer's monthly vehicle payment. Having a good script to explain the product and get the consumer to initial acceptance or decline of the product on the menu is a good way to show honesty and transparency. Some dealers videotape aftermarket sales presentations which is a practice you should discuss with your attorney.
3. Follow the 300% rule. Offer 100% of your products to 100% of your customers, 100% of the time. Also don't vary the prices to different groups of consumers. There has been talk in the industry that the CFPB and FTC are looking at "disparate impact" discrimination theories based on protected classes of people under ECOA (race, color, religion, national origin, sex, age, marital status, receipt of public income, and more under state laws) being charged more for aftermarket products that white males.
4. Don't ever "payment pack" an optional aftermarket product into the price of a vehicle. Doing so is not only a deceptive trade practice but will cause a Truth in Lending violation because failing to disclose the optional nature of the products makes their cost a part of the "finance charge" and makes your APR disclosure inaccurate. Truth in Lending violations start at $1,000 each and class actions are possible as well. Payment packing is getting particular regulatory scrutiny. The practice of getting a customer to agree to a high monthly payment amount leaving room to add aftermarket products into the payment amount is an unfair and deceptive trade practice according to the FTC.
Federal and state regulators will be examining your aftermarket sales products and processes. Many state laws let consumers bring unfair and deceptive act lawsuits privately as well. Clean up and be able to defend your aftermarket product selling as this "next big thing" for regulators appears to be well underway.
© 2016 Randy Henrick & Associates, L.L.C.