Some dealerships are overly marking up prices on F&I products, and those markups are putting a bull's-eye on all retailers' F&I sales practices, industry watchers warn.
A number of federal, state and local regulators are already investigating dealerships for fraudulent activities connected with F&I product sales. Some observers predict the Consumer Financial Protection Bureau could begin scrutinizing those products, too.
"This is an area that the CFPB is going to be looking at, if they're not already, because it's very similar to the way [loan] markup works," said Nick Smyth, a financial services regulatory attorney at Reed Smith in Pittsburgh. "Since there is discretion [in pricing], there is potential for disparities along race or gender."
An add-on product is an aftermarket product or service that is financed on an auto buyer's vehicle loan or lease contract. Examples include extended service contracts and road service.
Regulators over the past two years have investigated dealerships for excessive price markups and unfulfilled guarantees on add-on products.
For example, the Federal Trade Commission outlined an initiative called Operation Ruse Control in March.
The initiative targeted auto-loan application fraud, deceptive practices related to add-on products and services, and deceptive advertising. The FTC, along with 32 enforcement agencies, conducted a nationwide and cross-border crackdown that resulted in 187 enforcement actions in the U.S. and 65 in Canada.
And in June, New York Attorney General Eric Schneiderman announced multimillion-dollar settlements with some dealerships over the alleged unlawful sales of credit-repair and identity-theft prevention products from vendor Credit Forget It.
The attorney general said the dealerships sold the products for as much as $6,000, often without the customers' knowledge. The products cost the dealerships $179 or $279.
Sources told Automotive News in June that as many as 36 dealership groups had been targeted in the investigation into Credit Forget It.
Industry experts say the crackdowns will continue.
One way dealerships can protect themselves is by selling F&I products that have a clear benefit to the consumer, said Dan Doman, general counsel for RouteOne, which provides automobile financing systems to dealerships. And "the disclosure [of that benefit] has got to be adequate," he said.