MCLEAN, Va. — The National Automobile Dealers Association issued a memorandum this morning, warning members that the Federal Trade Commission has recently issued civil investigative demands (CIDs) to dealers in connection with the sale of biweekly payment products.
The notice also stated that the NADA’s legal and regulatory affairs team has received a number of questions and comments from members regarding biweekly payment services. The NADA noted that the goal of the FTC’s probe remains unclear, but it warned members that such programs could be susceptible to claims of unfair and deceptive acts and practices (UDAP).
“If accurately presented to your customers, with full disclosure of the costs and optional nature of the product, such bi-weekly payment plans are not inherently 'illegal' or noncompliant with federal law,” the memo stated, in part. “As with any product or service, however, if presented to consumers improperly, or in a misleading fashion, dealers could face numerous compliance risks.”
Biweekly payment products generally provide a service to the F&I customer in which half of the monthly car payment is deducted from the customer’s bank account every two weeks and sent directly to the finance source on the borrower’s behalf. As a result, the borrower, in effect, prepays their auto loan or lease, causing overall interest charges to be reduced. In such transactions, the NADA clarified, the dealer is not a party to the contract, but the dealer is paid a fee by the biweekly product company for selling the biweekly option.
“However, because of the basic characteristics of automobile loans, the costs associated with such programs can easily exceed the potential benefits, and therefore such products can be particularly susceptible to UDAP or similar claims,” the memo warned.
The memo also offered an example of how the costs of such services can outweigh the benefits. The example shows a customer financing a $27,342.96 vehicle purchase for 60 months. The APR is listed at 8%, while the monthly payment is $556.26. The example then lists an initial fee for the biweekly service of $399, as well as convenience fees ($1.95 paid every two weeks for a total of 110 payment) totaling $214.50 over the life of the service. Total fees paid by the borrower, according to the association’s example, is $613. The NADA then subtracts that total with the customer’s interest savings, which, by reducing the term from 60 to 55 months, totals $656.61.
“In this circumstance, the net benefit to the borrower is $43.11,” the NADA noted. “While a regulator may not find that the biweekly payment service was unfair or deceptive in this instance, it may be different if the F&I personnel promoted this program as offering ‘substantial savings’ or used similar terminology.
“In addition, one can easily see where any change in the facts above (a lower interest rate, a shorter term, a reduction in the amount financed) would negate even this modest benefit,” the association added. “And from the dealer’s perspective, such changes in the facts could create difficulties. For example, offering this product could be difficult to defend if the program fees are such that the average borrower would not see a net benefit (based on the average amount financed, rate, term, etc.).”
The memo, however, did acknowledge that such factors are not always controlled by the dealership. And in many cases, it added, the dealership may not be aware of the potential problem.
“However, any situation where the dealer is offering a product of marginal value creates a risk that the product would be heavily scrutinized,” the association stated. “The bottom line is that dealership F&I personnel must be aware of the specifics of these or any other F&I products they sell, and must ensure that F&I staff is properly trained to accurately and adequately disclose all fees and costs, and not to overstate any potential benefits.”
A spokesman with the FTC could neither confirm nor deny the agency’s probe.
Robert Steenbergh, founder and CEO of US Equity Advantage, a provider of biweekly payment products, said he was unaware of the FTC’s probe and had not heard of any of the firm’s dealers being contacted by the agency. But he was critical of the NADA’s memo.
“It is disappointing and apparent that the NADA has written this opinion without any in-depth conversation with a credible biweekly provider,” Steenbergh stated in an email issued to F&I and Showroom. “That being said, and to address their points, very few people attempt to try this process themselves (estimates are between 2% and 5%). And for those who do, the reality is that all lenders apply extra payments differently. And without an ongoing auditing of a consumer’s account, the self-service consumer could see zero benefit due to misapplied additional payment. Their effort would be for naught.”
Steenbergh also said the NADA did not take into account the fact that a vehicle is a depreciating asset, claiming that there is great value in paying down the vehicle loan in an accelerated manner. “It has been shown that, on average, consumers return to the dealership with an approximately $3,000 better equity position in the vehicle,” he stated. “That’s $3,000 less negative equity that the consumer — had they not enrolled in a biweekly program — would have to pay out of pocket or roll into their next vehicle.”
As for the NADA's sample calculation, Steenbergh acknowledged the author does the math correctly. However, he charged the author with failing to “value the increased equity position of the vehicle we outlined, the positive effect paying early has on credit scores, the fact that there is no chance of being late on a payment …, or the fact that some companies, such as ours, allow the consumer to enroll unlimited loans, including other vehicles, mortgages, credit cards, etc., at no additional enrollment fee."
“Including those additional savings in the calculation greatly changes the author’s math and alleviates any concern that the consumer is not getting a more-than-reasonable value for their investment in the program,” Steenbergh said.
“… we have no concern whatsoever in our program and the manner in which it operates. We believe in full disclosure and are 100% transparent with all terms and fees," Steenbergh added. "We personally call every consumer who enrolls in our service prior to their account being debited to assure that they have complete understanding of how the service works. We also provide them with visibility into their loan management through online accounts, where they can track their progress, request changes and review other loan details."
