(Originally published on Dealer magazine)
You may be forced to find out.
How many less cars would you sell if you couldn’t spot deliver cars?
What if you couldn’t add negative equity into a transaction?
What if you couldn’t make any reserve money on the financing?
What if the mark-up on back-end products was regulated?
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). This legislation gave the Federal Trade Commission the authorization to regulate, in essence, how car dealers do business by defining “unfair or deceptive acts or practices by motor vehicle dealers.” It seems now the FTC is moving towards defining, and enforcing this.
On March 15, 2011, the FTC announced the start of a series of public round roundtables in which they are seeking “data and empirical evidence” to begin deciding in what way, and how, to regulate car dealers.
The question isn’t whether they will, it is in what way. The FTC is a consumer protection organization. “Unfair and Deceptive” are certainly subjective terms which mean different things to car dealers than they do to consumers.
In the roundtables, some of the questions they want feedback, data and evidence on are very telling on how they view the practices of dealers. The mere fact that they are asking the questions at all leads me to believe that they already have some idea of the answer and just want confirmation (or the opposite) of their views.
So let’s go on a jaunt holding hands with the FTC while they explore, and decide, the fate of your store’s profit.
Q: Do motor vehicle dealers engage in “yo-yo financing”?
This question is obviously talking about spot-delivering customers and then having to re-write them. The definition they use in the footnotes defining “yo-yo financing” pretty much alludes that dealers intentionally do this and focuses on instances in which the actual secured financing increases interest rates and/or elevates monthly payments. If the FTC is asking whether consumers believe this is an unfair or deceptive practice, someone believes it is. If the FTC decides to regulate rewrites, which is the natural solution in protecting the consumer, the response by a dealer will have to be to cease spot deliveries. It’s hard to believe that they will prevent dealers from offering consumers more favorable terms after delivery so my guess is that regulation would be limited to instances in which terms are less favorable. What’s less favorable though? The question focuses on two components: higher interest rates and higher monthly payments. There are many facets of any deal that could cause either of these things to occur. Shortening the term of the loan would increase monthly payments. Will that be considered “unfair and deceptive”? I’m sure you can see how their definition immediately impacts how, and to whom, you spot deliver a car (or if you do at all). This changes how you desk a deal even. If you know that you can’t spot deliver a vehicle unless you can pretty much guarantee that you won’t have to re-write them unless the terms are more favorable to them, you are forced to offer WORSE deals up front, in the box. This just makes deals harder to close. How many sales would you lose from customers that cool off between the time you would have spot delivered them and the time you actually get an approval and are able to complete the delivery?
Q: Do finance companies provide incentives or payments to motor vehicle dealers in exchange for consumers receiving more expensive credit? Do motor vehicle dealers charge interest rate markups..for credit or leases about which consumers are unaware?
Yes. It’s called reserve and, apparently it’s being considered as an unfair or deceptive practice. I highly doubt most consumers are aware that dealer-secured financing isn’t always at the “buy-rate” and that dealerships can make money by marking up the interest rate. Sure, we can justify it a lot of ways but the bottom line is that if consumers believe it’s unfair, and the FTC agrees, dealers could lose the ability to make reserve. How does this affect how you sell a car, work a deal, or determine the selling price discount you would offer to a customer?
Q: Is substantial negative equity from a prior purchase, or money owed on a prior lease, frequently rolled into consumers’ next vehicle purchases or leases?
I highly doubt that the FTC will remove a dealer’s ability to roll negative equity for several reasons: banks already monitor and regulate loan-to-value and limit the amount of negative equity they will accept. What I do think could happen though is that the FTC could limit theamount of negative equity a person could roll into a new loan or lease regardless of the purchase price, loan structure or bank criteria. What if the maximum you could roll into a deal is $5000? $4000? Does it make a difference in how much your car costs? Will some makes get an advantage over others if the amount is regulated (versus a percentage)? How they choose to do this and/or determine this will absolutely effect how a deal is structured and/or if it happens at all.
Q: Do motor vehicle dealers engage in credit or lease packing, such as by including amounts for credit insurance, guaranteed automobile protection (GAP) or other add-ons into payment amounts?
I thought this was addressed by the single document rules but, apparently, the FTC is investigating this as well. They also want to investigate and consider the mark-ups allowed on these products thus limiting the price at which you could sell them. What’s a fair markup? Do you think your answer would match a consumer’s answer to that question?
These are just four of the 14 questions (each of which have multiple parts) that the FTC will be considering at the roundtables. I actually counted each question and sub question being considered and there are 72 questions that encompass a huge range of topics including: discriminatory financing offers on the dealer level, financing military personnel, paying off liens or trade-ins, the use of GPS devices on financed vehicles, vehicle auction houses, and more.
The first roundtable is scheduled for April 12, 2011 in Detroit, MI. They say there will be a total of 4 roundtables disbursed around the country but the other ones haven’t been announced yet. Given the chance, I’d love to be a part of one of those roundtables as a fly-on-the-wall.
To read the whole text of the announcement and all the questions that will be posed to the public, visit this link. Just the URL name alone (that’s not anywhere in the document) should give you an idea where this is headed: AutoTaskForce
