It is truly a remarkable phenomenon that an industry of such size and breadth, the automotive ancillary product industry, has engendered the scorn of both government and consumer organizations when these products have provided true benefits to consumers when called upon. This grim view has consequences in the form of legislation, rulemaking, investigations and enforcement.
In an April 2016 report, investment bank Colonnade estimated the F&I products market to be a $77 billion industry, with retail sales of vehicle service contracts estimated at $28 billion in 2014. Another source puts the VSC industry totals at $29.4 billion at retail. According to the NADA, 41.9% of new vehicles sold have a VSC attached to the deal. Surprisingly, over 20,000 offshore ancillary product companies are headquartered in the Caribbean, serving the automobile industry.
In legal parlance, an ancillary product is one which aids, or is attendant upon, the principal product, which, in this case, would be the motor vehicle. The product is subordinate in nature to that vehicle. “Add-on products” is also a commonly used term which, in some quarters, is used pejoratively.
It is estimated that there are over 5,000 different variations of ancillary products depending upon their various terms and conditions. The term also includes such diverse products ranging from extended service contracts and auto club memberships to mud flaps and fabric protection.
Government and Consumer Advocates’ Commentary
It is readily apparent that the CFPB does not accord ancillary products much respect. A recent CFPB request for information relating to ancillary products was stated as follows:
“Among other practices and concerns, the Bureau has found or alleged that some companies offering ancillary products failed to accurately describe those products, [and] offered products that provided little or no benefit to consumers without disclosing this fact … ”
The Consumer Federation of America (CFA) and the North American Consumer Protection Investigators Association (NACPI) have, over the past several decades, produced a report based upon consumer complaints to state agencies. For almost every year that it has been produced, automobile complaints have been the No. 1 type. As part of the report, in Appendix B, the report provides “Tips for Consumers from the 2016 CFA/NACPI Consumer Complaint Survey Report.” Under the Auto category, it castigates ancillary products as it states:
“Resist pressure to buy extended warranties or other expensive add-ons when you purchase a car. They’re usually not worth the cost and don’t provide much more protection than you already have under the warranty and your insurance coverage.”
Edmunds is also not a proponent of ancillary products, as its website puts it bluntly: “Not every extended auto warranty company is out to rip you off, but over the course of our research, we found that the honest ones are few and far between.”
In 2016, Consumer Reports once again dismissed extended warranties as it recommended that it would be more prudent for consumers to put money aside for vehicle expenses rather than purchase extended warranties.
There are certainly other such examples.
A Stark Example of Potential Government Regulation
The Federal Reserve Board has been a highly reasonable overseer of consumer protection over the years and has promulgated rules and commentary, which has been quite fair to the public and industry alike. Regulation M, for example, is such a model of equanimity. However, it proposed in 2010 an almost <ital>in terrorem<ital> notice to be included in retail installment sale contracts and lease contracts which would cause almost anyone to seriously reconsider purchasing an ancillary product. The term, <ital>in terrorem<ital>, is as menacing as it sounds, and is Latin for “into or about fear.” It is usually provided with the hope of compelling someone to act in some way.
Here are the extracts of this warning:
As one can see, this notice is not neutral and implies that the consumer needs to reflect upon his contemplated purchase. Fortunately, it was not effectuated. Such regulatory oversight is now within the ambit of authority of the CFPB. But, as indicated above, the CFPB would not disagree with this type of notice.
Threats to Ancillary Product Sales
Under the Truth in Lending Act, retail installment sale contracts contain certain key terms such as the “annual percentage rate” and the “finance charge.” They are conspicuously presented in the “Fed Box”:
The finance charge is the cost of credit expressed as a dollar amount. Certain third-party charges, such as credit insurance, can be excluded from the finance charge if other disclosures are provided to the consumer.
This is significant, since the greater the finance charge, the higher the APR. The APR can be increased substantially should all these third-party charges be included in the finance charge. There is a legislative movement to force creditors to include these charges in the finance charge. This is what is termed an “all-in rate cap.”
Coupled with a statutorily limited percentage rate, there could be a significant limitation on the availability of consumers to purchase ancillary products. Moreover, increasing the APR will chill sales of vehicles generally. There has been a trend towards this type of legislation as tracked by the American Financial Services Association (AFSA):
State Attorneys General and Memories of US Fidelis
In 2010, US Fidelis declared bankruptcy and was then sued by various state attorneys general for over $20 million in 2012 for routinely defrauding consumers regarding service contracts.
The Latin legal maxim <ital>exceptio probat regulam<ital> should be relevant here. It is translated as “the exception proves the rule.” However, it is not. With the ancillary product industry being so substantial, the US Fidelis case should demonstrate that it was the exception and the rule is that ancillary product providers are sound corporate citizens. However, that maxim doesn’t apply to the view of state regulators. They remain skeptical of ancillary products. Here are a few examples of that skepticism put into recent action:
- New York Attorney General Eric Schneiderman reached a settlement for $1.6 million with multiple auto lenders for alleged use of deceptive sales tactics to sell add-on products and services.
- Massachusetts Attorney General Maura Healy reached a settlement for $7.4 million with finance companies over allegations of charging interest rates that exceeded the 21% cap due to the inclusion of GAP coverage on subprime auto loans.
- Florida Attorney General Pam Bondi settled a case against a dealer for $5 million regarding misrepresenting GPS devices.
There are many examples of these prosecutions which were considered violations of the Unfair and Deceptive Trade Practices Act (UDAP).
A Labyrinth in Quicksand – What to Do
The ancillary product world can, at times, be quite complex. Some products are quite simple whereas others demand sober legal analysis. Here are some considerations and recommendations:
- A full legal analysis and calculus of every product by state should be performed by an attorney. Issues such as, can the product be sold, is it insurance, what licenses are required, rebate protocols, how the state retail installment sales act interacts with the product, and other issues need a thorough examination.
- Document in a separate form all the products sold to the consumer.
- Does your dealership have all related forms and documents required by federal and state law to be provided to a consumer at the time of sale, such as warranties, additional product disclosure menus, contract cancelation agreements, and conditional delivery agreements? The product needs to be appropriate to the consumer’s needs or it could be a UDAP violation.
- Follow the 300% Rule:
- An F&I manager should offer 100% of the products to 100% of the dealership’s customers 100% of the time.
- There are cases in which the failure to offer a product was grounds for a lawsuit.
- Following this rule may assist in avoiding allegations of discrimination pursuant to the Equal Credit Opportunity Act (ECOA) and Regulation B
- It may avoid the allegation of payment packing.
- It ties well with menu selling.
- “We will offer 100% of the products that a customer is eligible for or that can apply to his transaction to 100% of the customers 100% of the time.”
- The product needs to be appropriate to the consumer’s needs or it could be a UDAP violation.
- If a dealer is engaging in menu selling he should consider these practices:
- Always list the base payment without any ancillary products somewhere on the menu.
- Have consumer sign or initial each page.
- Have a written menu plan.
- A dealer or finance manager should not be impermissibly splitting or sharing insurance commissions with a coworker who is not licensed.
- Understand the commission structure. A dealer might be paid commissions in excess of those permitted by applicable law or in excess of those set forth in the applicable premium rate filing made by the insurance company with the applicable state insurance department.
- Know what disclosures are required. A customer might be sold insurance without first receiving required disclosures (such as required disclosure of insurance eligibility requirements) and/or without signing documents that indicate that the customer understands that the purchase of insurance through the insurance producer is optional, not required.
- Evaluate whether the product can provide value to the consumer. A customer might be sold insurance for which the customer is not eligible (for example, due to the customer’s or the vehicle’s age) or that is otherwise not suitable for the customer (not in the customer’s interest).
- Include notice of the inclusion of a GPS or starter interrupt device.
- In direct marketing of ancillary products, target lists should be scrubbed of people who wish to be excluded.
- Charge the same price for the same product or grouping of products
- Monitor and adjust your menus, scripts, and practices as a consequence of consumer responses and satisfaction indices
- Maintain a detailed menu log.
- If engaging in selling campaigns by telephone or electronic media understand the federal and state “do not contact rules” such as the Telephone Consumer Protection Act. Procuring express permission, by the use of a form, would be prudent.
- Some states have passed legislation requiring various disclosures and protocols. Although they may not be necessary in some states they are examples of best practices and should be considered for implementation elsewhere:
- Provide a copy of the proposed contract to a consumer before a sale.
- Allow a “free-look” period that allows a purchaser to cancel the contract within at least twenty business days or so after purchasing.
- Provide full refunds, minus any claims paid, for cancellation.
- Do not use the word “warranty” when, in fact, such contracts are not considered “warranties” under law.
- Do not represent falsely that the offered service contract is affiliated with a manufacturer.
- Do not represent that they have knowledge that a consumer’s warranty is expiring.
Finally, support the Voluntary Protection Products Coalition, which includes 16 organizations, including the NADA, NIADA, American Bankers Association, American Financial Services Association, Guaranteed Asset Protection Alliance and Service Contract Industry Council. This coalition is seeking to protect the ancillary product industry’s legal rights and privileges. Participants in the ancillary product world have much to protect. Govern yourselves accordingly.