Worry that federal regulators' crackdown on dealer markup might spill over into F&I products is revving an industry trade group's efforts to get state-by-state legal definitions for those products, and rules for how they're sold, on the books.
Part of the strategy is to head off tougher regulations that the states might approve without industry input.
The F&I menu items that could come under fire, known as ancillary products, include tire-and-wheel protection, paintless dent repair, appearance care, windshield-chip repair, key replacement and anti-theft products.
The effort to get ancillary products on a sound legal footing in the states has been going for more than five years, according to Tim Meenan, general counsel for the Motor Vehicle Ancillary Products Association in Tallahassee, Fla.
But the group is even more eager to complete that goal in light of an enforcement action against an F&I vendor last year by the Consumer Financial Protection Bureau. That move hinted that federal regulators may be looking to make new rules.
"We do believe that in the next two years there will be a period of greater scrutiny regarding the marketing and the provisions of [ancillary] products," Meenan said in an interview.
Legal status vague
In many states, ancillary F&I products are vaguely defined, defined in a way the industry doesn't like or absent from regulations, Meenan said.
"Legally, they are where service contracts were 20 years ago," he said. "That is, there are a lot of them being sold. Yet there's not enough certainty in the laws that legislators and regulators know enough about their legal status."
Meenan is also general counsel for trade associations for extended service contracts and GAP. (GAP, or guaranteed asset protection, pays off the shortfall if insurance proceeds on a stolen or totaled vehicle aren't enough to pay the owner's remaining loan or lease balance.) Those groups have been lobbying for model legislation for many years, Meenan said.
The effort to fight state laws that in effect would ban certain features of ancillary products, or that would have classified them as insurance, began in 2007. As insurance, F&I products would be subject to much more regulation, including price controls in some states.
On the radar
Now, though, the cause has new purpose. The CFPB showed it had F&I products on its radar in June 2013, when it reached a consent agreement with F&I vendor Dealers' Financial Services and its preferred lender, U.S. Bank.
The CFPB said Dealers' Financial Services and the bank were responsible for marketing that exaggerated the benefits and minimized the cost of extended service contracts and GAP sold to military service members. U.S. Bank dropped its participation in the program, called Military Installment Loans and Educational Services, or MILES for short.
At an industry conference in September, a panel of executives for companies that sell F&I products to dealerships recommended that dealerships stick to suggested retail prices for F&I products instead of charging whatever the market will bear for each customer.
Consistent pricing would make it less likely regulators could complain about overcharging certain customers, the panelists said. Inconsistent dealership pricing is at the heart of the CFPB's argument against dealer markups on auto loans.
To avoid that accusation, and to avoid customer dissatisfaction over inconsistent pricing, many dealership groups impose fixed prices or caps on prices for F&I products. Two of the nation's largest retail groups, AutoNation Inc. and Group 1 Automotive, say they limit dealer markup on F&I products.
Despite the MILES case, not everyone thinks the CFPB is a threat to F&I products. Rick Hackett, a former assistant director of the CFPB, said at the conference the CFPB probably would like to regulate F&I products but likely doesn't have jurisdiction. It oversees lenders, but not dealerships, except for buy-here, pay-here stores.
general counsel for the Motor Vehicle Ancillary Products Association
Hackett, who left the CFPB in 2013 and is now a partner at Hudson Cook law firm, said the MILES case was an unusual set of circumstances. In that example, the lender was more closely involved with the sale and marketing of F&I products than is usually the case, he said.
"I wouldn't expect to see a lot of action with regard to ancillary products," he said.
However, other regulators besides the CFPB could take an interest in F&I products. The Federal Trade Commission, for instance, has jurisdiction over dealerships, other panelists at the conference said.
Borrowing from NADA
To get out in front of possible new regulations, the Motor Vehicle Ancillary Products Association is lobbying state legislatures to legally define the products so that those products are not regulated by state insurance officials. The group said it would be willing to accept rules such as F&I companies registering with state officials and submitting consumer disclosure documents for state approval.
According to the group, it has helped get ancillary F&I product legislation passed in Alaska, California, Indiana, Michigan, New Jersey, Ohio, Oklahoma, Texas, Virginia, Washington and Wyoming. In 2015 the group plans to work on laws in Pennsylvania, North Carolina, Arizona, Utah and Nevada, Meenan said.
The association typically adds the ancillary F&I product language to model legislation for extended service contracts and GAP, although details can vary by state.
Meenan said that in addition to advocating legislation, the F&I products industry could consider borrowing a page from the National Automobile Dealers Association.
NADA recommended in early 2014 that its members pick a fixed price for dealer markup on loans and stick to it. Dealerships should also cite a justifiable business reason from a preapproved list whenever they offer a discount below the fixed price -- for example, to meet a competing offer, NADA said.
Meenan said a similar approach could work in F&I products. Many F&I product administrators have already set suggested retail prices, but there's little that administrators can do if dealerships charge more.
"It's not impossible to charge everybody the same price," Meenan said. "That's not how it's done today, but it's not impossible. It's something we could be doing."