Bundling, dealer reserve may draw whistles on regulatory gridiron
Some items related to auto lending could come under scrutiny by government regulators, speakers at the Consumer Bankers Association convention in Texas said last week. And that could be cause for worry, they said.
1. Bundling: More F&I vendors and dealerships are packaging aftermarket products instead of pricing them individually.
Doug Ekizian, senior manager of the Consumer Finance Group at PricewaterhouseCoopers, said in a presentation on "enterprise risk management" that regulators might not like that.
"Aftermarket products should not be bundled in such a way as to obscure relative costs. ... The total cost of a product, including interest, points and fees, should be easy for a customer to understand," he said.
2. Customer complaints: The Consumer Financial Protection Bureau has launched a Web site, consumerfinance.gov/complaint/, for gathering consumer complaints about financing, including auto. But lenders say the auto finance complaint platform is overly broad. The CFPB has begun to exercise its jurisdiction over depositary institutions -- those offering checking and savings accounts -- but not nondepositary ones, such as captives and independent finance companies. Yet the site is open to complaints about all auto lenders. Lenders worry the site will attract complaints about companies the bureau isn't yet monitoring and can't do anything about. When those complaints aren't addressed, lenders fear consumers will blame them, not the bureau.
The CFPB hasn't said just how it will forward a consumer complaint to a lender that was the subject of that complaint.
"The list of complaints is building," Ekizian said. For example, he said, consumers have read about mortgage "modifications" to keep borrowers in their homes even when they're behind on payments. Some consumers are disappointed to learn auto lenders don't work the same way, he said.
Separately, the American Financial Services Association sent CFPB Director Richard Cordray a written complaint on March 13.
"When they created a credit card [complaint] platform, there was a lot of dialogue back and forth. We didn't see that" for autos, said Bill Himpler, AFSA executive vice president.
3. Dealer compensation: At roundtable discussions last year, the Federal Trade Commission heard repeated complaints about dealership scams such as "packing" cars with unwanted options and so-called yo-yo financing, in which the original deal falls through and the customer has to come back and sign a new and potentially more expensive contract.
Dealer reserve, in which the dealer arranges the financing and marks up the customer's interest rate to share in the profits, also came in for criticism.
Andy Koblenz, chief counsel for the National Automobile Dealers Association, said the industry has three good arguments why there's no need to create new regulations for some common complaints cited at the FTC roundtables:
They're already illegal. This would apply, for example, to "packing" cars with unwanted options.
They occur only rarely. For example, yo-yo financing. Consumer-advocate groups see this as a sneaky tactic to get more money. The industry sees it as a mistake most dealers probably prefer to avoid.
They're based on old information. Overcharging for rustproofing was once a common complaint. Even though it's virtually unheard-of today, it still comes up as an example of shady dealer business practices.
None of those arguments applies to dealer reserve, though, Koblenz said. And that could make it a regulatory target.
"It happens all the time. Is it happening today? It is. Is it currently illegal? No," Koblenz said.
He said one legal argument in favor of today's dealer compensation is that it does no harm. If anything, he said interest rates on indirect loans negotiated by dealers are often lower than direct loans with no middleman.
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