Dealers, captives battle in statehouses

At issue: Pressure to sell branded F&I products

Ted Smith: Fla. dealers want “open competition” for F&I products.

Published in Automotive News March 10, 2014

A battle is heating up in several state capitals as dealer associations face off against carmakers and their captive finance companies over proposed state laws governing the sale of F&I products such as extended service contracts and guaranteed asset protection.

"We're essentially interested in maintaining open competition in the marketplace for all of those products," said Ted Smith, president of the Florida Automobile Dealers Association.

The details vary state by state. But state dealer groups say they are trying to get laws passed that would limit the ability of automakers and captives to pressure dealerships to sell F&I products backed by the factory or a preferred vendor and to stop selling products sold by independent F&I administrators. "This is something that could be utilized more often by these companies, and that's a problem," Smith said.

List of grievances

Executives for state dealer associations said dealers don't like being pressured on general principles. They also worry about offending a captive lender over F&I products when that same lender may also provide their floorplan financing, commercial lending and the bulk of their retail financing.

Third-party products can be more profitable for a dealership than captives' products, especially when the third-party products are backed by a reinsurance program, enabling the dealership to contribute to the reserves used to pay future claims. After all claims and administrative fees have been paid, the dealership can keep a portion of the money left in the reserves plus any additional investment income.

There are big tax advantages on the profits from reinsurance. Many dealer principals use reinsurance to make acquisitions or for their personal retirement fund.

Captive finance companies offer reinsurance, too. However, some dealerships want to maintain their long-term relationships with independent F&I administrators, dealer groups said.

Dealerships also want to offer a range of products to fit a range of customers. Depending on the features and benefits, the independent F&I products can also be more affordable than ones from the captives, the groups said.

The pressure to sell captive F&I products can be overt. For example, incentives could be paid or withheld based on product penetration with the captive, dealer groups said. Or the captives might not lend as much toward the purchase of third-party products.

If an automaker and its captive come up with a program that finances "$400 more on their product than if a dealer sells an aftermarket product, that's a big thing at the dealership F&I level," said Bob Corbin, CEO of Innovative Aftermarket Solutions in Austin, Texas, a dealership software provider which offers aftermarket F&I products.

"The factories are trying to sell their products because they have come to realize the benefits of maintaining brand loyalty," Corbin said. "If they get the loyalty with the car, they want the loyalty with the loan, and now the GAP and the tire-and-wheel."

There also can be indirect pressure. Dealer associations said some captives require customers to sign a waiver when they buy a product that's not backed by the factory if they want to finance the purchase on the same contract as the car.

'A profit center'

Florida association leader Smith said manufacturers' interference with dealers' ability to place third-party products has heated up in the past few years as several captives have introduced lines of branded F&I products. "We believe this is an effort by some manufacturers that look at the profitability of those various products," he said. "They're saying, 'There's a profit center we really aren't maximizing.'"

Representatives of the dealer associations interviewed for this article wouldn't say which captives are pushing requirements on dealers, but two sources who didn't want to be named said a recent example involved Volkswagen of America and VW Credit.

VW Credit Inc. acknowledged in an e-mail to Automotive News that, in response to dealer feedback, it agreed in January to finance GAP contracts other than its own.

"VCI does not require VW or Audi dealers to exclusively sell or finance its ancillary products, with one exception," the company wrote. "The one exception is the Lease Excess Wear Protection product, because it represents a waiver of certain lease contract terms, and we are the only party authorized to make such waivers. This practice is customary amongst captive lenders for this type of product and has been part of VCI's product since introduction approximately 21/2 years ago."

The Florida dealer association is advocating a bill that would prohibit a captive from refusing to purchase a vehicle contract, charging an extra fee, or offering less favorable terms for a finance contract that includes a third-party aftermarket product, provided the third-party product is "substantially similar or superior" to the comparable captive product. The bill didn't get passed in 2013 but is back on the legislative agenda for 2014.

N.J., S.C. and elsewhere

The New Jersey Coalition of Automotive Retailers backs a bill that would prohibit automakers or captives from "requiring or attempting to require a franchisee to offer any finance, insurance, warranty, service or repair plan or other product." It would also prohibit carmakers and captives from withholding or threatening to withhold any benefit or incentive from a dealership that offers third-party F&I products.

Said the group's president, Jim Appleton: "For an automaker to create incentives or offer benefits or withhold benefits contingent on whether the dealer adequately represents a third party -- a party that's not a party to the franchise agreement, and the captive is not a party to the franchise agreement -- is fundamentally unfair.

"If they want an exclusive relationship, let them [the captive] negotiate an exclusive relationship. This puts the manufacturer in the position of kind of blackjacking the dealer into offering their products."

In South Carolina, the legislature passed a bill in June 2013 -- backed by the South Carolina Automobile Dealers Association -- that made it a violation for a manufacturer to "require, coerce, or attempt to coerce any motor vehicle dealer to offer to sell or to sell any extended service contract, extended maintenance plan, financial product, or insurance offered, sold or sponsored by the manufacturer."

That's according to an online summary by the American Financial Services Association, a lender trade group in Washington, D.C.

The South Carolina law also said a manufacturer cannot "use any financial services company or leasing company owned or controlled by the manufacturer or distributor to accomplish what would otherwise be illegal conduct on the part of the manufacturer or distributor."

As in those three states, similar issues are being hashed out in Mississippi, Illinois, New Hampshire, New York, North Carolina and Oklahoma, according to AFSA.

AFSA members include captives, banks and independent finance companies in the auto lending sector. In February, AFSA posted a white paper for members outlining the issues with what it called "ancillary product provisions."

Third-party liability

According to AFSA, automakers and captives don't like financing someone else's F&I products at least in part because they can find themselves liable if a third-party administrator goes out of business.

"While the stated goal of this type of legislation may be to avoid preferential treatment of one company's ancillary products, state legislators should ensure this legislation does not impair a financial institution's flexibility to choose not to finance products from third-party providers that may put the financial institution in a position of financial responsibility for these products," AFSA said in the white paper.

AFSA filed a letter last year opposing the previous version of the Florida bill. AFSA said in the white paper it would continue to monitor the various state laws.

The state of states
State dealer groups are backing a variety of proposed state laws to prevent dealerships from being coerced to sell F&I products from automakers or captives rather than those from third-party providers. Here are some of the bills' nuances.


Mississippi; New York; North Carolina passed in 2013

The law:

Prohibits automakers and captives from requiring that dealers exclusively sell F&I products from the automaker
or captive. But it allows automakers to offer incentives for exclusivity and to require that dealers disclose if a product is not offered by the factory or the captive.


New Hampshire passed in 2013

The law:

Prohibits an automaker or captive from requiring product exclusivity. It allows a disclosure requirement but
does not specifically allow for incentives for exclusivity.


Oklahoma; South Carolina passed in 2013

The law:

Prohibits exclusivity requirements but allows incentives for exclusivity.


Illinois*, Florida, New Jersey

The law:

Restricts automakers from enforcing exclusivity, forbids incentives for exclusivity and forbids a required disclosure for noncaptive F&I products.

*The Illinois bill, originally written to cover only motorcycle dealers, passed the Statehouse in 2013 but was dropped from the Senate version.

Source: American Financial Services Association

You can reach Jim Henry at

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