The Biweekly Scare
It appears as though biweekly payment programs have landed on the radar of the Federal Trade Commission, at least according to the National Automobile Dealers Association (NADA). Providers of such services, however, say the probe centers on a single company and not the entire category. I wish I could confirm that. Unfortunately, the FTC isn’t talking.
Providers of biweekly payment services were understandably upset that the association failed to consult them before distributing a memo on May 8. Aside from alerting members of the FTC’s interest in the category, the association cautioned dealers about overstating the interest savings these products afford.
The NADA illustrated this point using a low-interest loan scenario with a total amount financed of $27,342.96. And according to the association’s calculations, the savings after fees associated with the biweekly service are paid amounted to an underwhelming $43.11.
“While a regulator may not find that a biweekly payment service was unfair or deceptive in this instance, it may be difficult if the F&I personnel promoted this program as offering ‘substantial savings’ or used similar terminology,” the memo stated, in part.
However, if the NADA had talked to providers, it would have learned that the pitch for biweekly payments has changed in recent years.
See, providers didn’t disagree with the NADA’s math, but in a joint memo issued to the association on May 20, four executives of biweekly payment services said interest savings isn’t the only benefit. The letter listed convenience, ease of budgeting, improved cash flow, faster loan payoff, reduced negative equity and elimination of late fees.
Sounds like marketing spin, right? Well, not exactly. In fact, Robert Steenbergh, CEO of US Equity Advantage, said as much when I talked to him in early March. He said dealers aren’t even including biweekly payment options in F&I product indexes. Instead, they are being used as another payment option for budget-conscious customers who balk at having their loan terms stretched to meet their payment requirement.
So if you have a customer who is interested in a vehicle service contract but doesn’t want his payment or term to exceed $400 or 60 months, the F&I manager can set the VSC term at 54 months and sign the customer up for the biweekly option. Not only will his payment not exceed that $400 cap, the customer will pay off his loan in 59 months.
“The dealer gets to sell something additional and consumers get something that benefits them, and it still fits in their monthly budget,” Steenbergh explained. The executive believes the option could help dealers make up for the loss of dealer reserve should the Consumer Financial Protection Bureau (CFPB) get its way.
So, yeah, it would have been nice if the NADA had talked to biweekly payment providers to see how the option is being used in the F&I office. However, I can’t fault the association for doing what it did. We operate in a highly regulated environment, and I’m sure the association’s proactive move was viewed favorably by regulators. Remember, accountability is big with the CFPB, and that’s what the NADA demonstrated with its memo.
In fact, it’s been a year since the CFPB took action against U.S. Bank and Dealers’ Financial Services (DFS). And if you recall, the CFPB didn’t like the way the companies marketed GAP and service contracts under the Military Installment Loans and Educational Services (MILES) program.
According to the bureau’s complaint, DFS claimed in its marketing materials that the service contract would add just a “few dollars” to the customer’s monthly payment when it actually added $43. As for GAP, the product provider claimed in its marketing materials that the coverage cost only a few cents a day when, according to the bureau’s calculations, DFS staffers were 40 cents short of the actual daily cost.
I am not in the business of endorsing any F&I product or service, but I believe we should have every tool at our disposal to secure each vehicle purchase and product sale. So use this latest regulatory scare as an opportunity to review how your F&I managers are presenting and disclosing all products and payment options.
Hey, the best producers I know do their jobs by the book, and there’s simply too much at stake to do it any other way.
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