The list includes questions about "packing" extra features into finance contracts and about including the cost of F&I products such as GAP and extended-service contracts in the finance contract; so-called yo-yo financing, where the dealership modifies the terms of the contract after a spot delivery, requiring the customer to return and sign a new contract; plus numerous indirect suggestions that consumers are unaware of what they're signing.
The questions also take aim at everyday practices that mainstream auto lenders and dealers take for granted, such as negative-equity financing and the notion that dealers participate in the profits from indirect financing.
Under the authority of the Dodd-Frank Financial Reform Act, the FTC is gathering comments that may be used either by the FTC itself or by the new Consumer Financial Protection Bureau as regulators review existing rules governing auto finance and consider new ones.
Besides the FTC's written questions and NADA's letter, comments submitted ahead of time included letters from several plaintiffs' attorneys and also a few individual consumers who complained about alleged abuses in their particular cases. The American Financial Services Association, a trade group for lenders, also submitted detailed answers to many of the FTC's questions.
Below are edited excerpts from the FTC's list of questions and the corresponding answers filed by AFSA. Special Correspondent Jim Henry compiled the questions and answers before the roundtable discussion in Detroit at Wayne State University Law School.
FTC: Do motor vehicle dealers charge interest-rate markups or upfront charges to consumers for credit or leases about which consumers are unaware? Do consumers understand that dealer financing may include dealer markups in addition to the cost of the credit or lease, and to what extent does this practice affect consumers' decisions to purchase and finance a motor vehicle?
AFSA: AFSA respectfully submits that the portion of the finance charge attributable to the spread between a retail contract APR and a wholesale "buy rate" is not, in fact, an amount that is "in addition to" the cost of credit. It is, instead, part of the cost of the retail credit and is included in the Truth in Lending Act disclosures of the APR and the dollar amount of the "Finance Charge."
AFSA respectfully submits that a buyer purchasing on credit from a dealer "knows, or at least has no reason to doubt, that the dealer seeks a profit on the financing as well as on the underlying sale."
FTC: Do motor vehicle dealers engage in "yo-yo financing"? How prevalent are these practices in the industry as a whole or in any subset of the industry? Is yo-yo financing sometimes combined with a practice whereby the dealer has sold the consumer's trade-in before the consumer learns of the higher interest and/or payments from the dealer?
AFSA: Dealers may submit a credit application to numerous prospective assignees, and often receive responses from them prior to entering into a RISC (retail installment sales contract). In a significant percentage of transactions, however, the dealer will enter into a RISC and deliver the subject vehicle to the retail buyer prior to receiving responses from prospective assignees. The resulting scenario is commonly referred to as a "spot delivery."
FTC: Is substantial negative equity from a prior purchase, or money owed on a prior lease, frequently rolled into consumers' next vehicle purchases or leases?
AFSA: ASFA believes that financing negative equity on a trade-in is a common practice that has become an integral element of vehicle financing. Many consumers would be unable or unwilling to acquire a new vehicle unless the dealer finances the net negative equity.