Finance and insurance products such as extended-service contracts and other add-ons could be the Consumer Financial Protection Bureau's next target in the auto lending sector.
F&I add-ons: Fed agency's target?
The Consumer Financial Protection Bureau, which has no jurisdiction over auto dealerships other than buy-here, pay-here stores, is working through lenders on areas that affect dealer profits.
Potentially at risk
• Finance reserve on loans arranged through dealerships
• Extended-service contracts
• Other aftermarket F&I products that are financed
"Apparently they are investigating a number of auto lenders, with questions and requests for information," said John L. Culhane Jr., a Philadelphia partner with Ballard Spahr, a law firm whose clients include auto lenders.
Culhane declined to say if the firm had direct knowledge of bureau requests for information. The bureau refused to comment.
Restricting the sale of aftermarket F&I products would hurt dealership profits.
Public dealership group executives said recently they were not worried that the bureau is targeting dealer reserve because the groups had shifted their focus from making profits on dealer reserve to making profits on F&I products.
AutoNation Inc., the nation's largest dealership group, said last month it gets about two-thirds of its F&I revenue from the sale of F&I products and about one-third from dealer reserve. For the first quarter, the group's average F&I revenue per vehicle was $1,322.
Dealer reserve is the profit dealerships make by adding to the customer's interest rate on loans negotiated at the dealership. In March, the bureau said it believes that letting dealers set the final interest rate for customers creates the potential for discrimination against legally protected groups such as minorities. The National Automobile Dealers Association, National Association of Minority Automobile Dealers and American Financial Services Association deny that dealers or lenders tolerate discrimination.
The bureau lacks jurisdiction over dealerships except for buy-here, pay-here stores, but the bureau said in connection with dealer reserve that it would hold lenders responsible for dealership actions. That approach also could apply to aftermarket products, routinely financed in the same retail installment contract as the loan.
Culhane participated in an April 16 Ballard Spahr Webinar aimed at lenders that identified "add-on products" as one of the bureau's next likely targets in automotive lending.
Culhane pointed out that last year, the bureau reached huge settlements with some of the nation's biggest credit card issuers, with an emphasis on how they marketed add-on products such as payment protection and credit monitoring. Capital One Bank, for instance, agreed to refund about $140 million to 2 million customers and pay an additional $25 million penalty.
The bureau said Capital One failed to always tell consumers that buying the products was optional. Many of these consumers later had difficulty canceling and getting a refund.
According to the Webinar, some of the same issues could apply to automotive lending, such as cancellation and refund policies, dealer pricing discretion, dealer training and detecting and responding to complaints.
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