A new law requires the Federal Trade Commission by Dec. 1 to issue rules on how dealers should advise low-scoring loan seekers as to why they're being offered only higher rates.
The Fair and Accurate Credit Transactions (FACT) Act also calls on dealers to supply customers with copies of their credit reports if managers are asked to do so.
Passed by Congress as a reaction to alleged rate-packing suits against megadealer stores and captive lenders, the FACT Act also has provisions that could help to prevent identity theft involving dealerships.
But, with full disclosure now a main mandate at dealerships, the extension of rules for F&I managers to subprime customers takes on added significance. Glenn Roberts, national F&I executive for Universal Underwriters, urges dealers to treat all customers — whether prime or non-prime — uniformly.
“Full disclosure and menu selling, listing every service and product offered, should be the same for every customer,” Roberts advises. “That's true whatever the credit score. Offer a loan applicant everything that's offered to your zero-risk customers to be on the safe side — a GAP (guaranteed auto protection) policy, service contract, credit insurance, whatever.”
He adds, “Be up front on what each product costs, making sure the menus state each product's price. You'll soon realize that you could bring in $100 or $200 more per vehicle just by offering all the products to all customers. After all, people won't buy what you haven't told them about.”
The newly imposed caps on interest rates charged by dealers on vehicle loans also should be fully explained, says NADA Chairman Charley Smith.
“Informed customers are likely to be satisfied repeat customers,” says Smith, a General Motors dealer in Hobbs, NM.
In connection with the FACT Act's requirement for credit-score record availability, NADA also has begun a campaign calling on members to tell all customers that loan rates may be negotiable and that dealerships may receive a portion of the fee amount as compensation for arranging the loan.
“We recognize that many consumers may not know that the interest rate may be negotiable or that the dealer may be compensated for obtaining financing,” says Smith. “This has created the misimpression that dealers have something to hide.”
In subprime situations, whether handled by the main dealership's F&I office or at a dedicated non-prime lot, customers are charged higher rates because of the risk associated with their ability to meet loan payments.
This generates, on average, higher potential profits for dealers, raising the issue of whether the dollar amounts of profits should be disclosed as well as the increased loan percentage.
States have weighed in on this issue. New York Attorney General Elliott Spitzer says dealers must disclose the amounts of their projected loan profits — prime or subprime — in addition to markup percentages.
That has irked many dealers, including Smith. He notes that no other retail industry is covered by a full-disclosure ruling requiring that profits be revealed, much less markup percentages.
A bill enacted by the California legislature, but vetoed by Gov. Arnold Schwarzenegger, would have set rate caps of 2%-2.5% on vehicle loans for prime customers, in line with rates authorized by General Motors Acceptance Corp. as part of a settlement earlier this year of a minority bias lawsuit. Schwarzenegger calls the rate-cap proposal “vague and unenforceable.” The California Motor Car Dealers Assn. fought it.
No chance exists for overriding Governor Schwarzenegger's veto, says Brian Maas, the association's legislative representative.
“The bill was a hodgepodge of consumer and dealer issues, instead of being focused entirely on loan rate caps,” he says. “A new measure, which can't be introduced until the legislature's next session in January, could gain dealer support if it sets loan cap equal to those implemented by GMAC and excludes such things as certified pre-owned car warranties and guaranteed refunds for cars up to a three-day period.”
Ford Motor Company, responding to a similar action, reduced its Ford Credit cap to 3%. Several megadealers also lowered their rates, in line with the actions of the large captive automotive lenders, including AutoNation, UnitedAuto Group and Sonic Automotive.
Full disclosure is emphasized in two new instructional pieces from NADA — a finance training video and a customer brochure, “Understanding Vehicle Financing,” produced with the Federal Trade Commission and the American Financial Services Association.
“The brochure spells out, step by step, what consumers need to do before they ever set foot in a dealership,” says Smith.
Subprime Specialist AmeriCredit Feeling Much Better
The rising tide of subprime loans is lifting with it one of the largest independent special-finance providers, AmeriCredit Corp., based in Fort Worth, TX.
AmeriCredit boosted its net income more than 10-fold in its 2004 fiscal year ended June 30, from $21.2 million in 2003 to $227 million in the 2004 period.
In the June quarter alone, auto loan purchases topped the $1 billion mark, reaching $1.75 billion, compared to $953.8 million in the March quarter and $686.9 million a year earlier.
AmeriCredit's dealer portfolio rose past the 10,000 mark in fiscal 2004, according to Chief Operating Officer Mark Floyd.
“The special-finance market AmeriCredit specializes in is growing very fast,” he says.
Demand for subprime loans has risen steadily because of job cutbacks, a rising divorce rate, Iraq war military call-ups and other factors squeezing vehicle loan applications out of the prime market, industry experts agree.
AmeriCredit, a 12-year-old company mired in red ink in the 2002-03 period because of a string of high-credit losses and dubious loan originations, restricted its loan volume to $750 million a quarter while it undertook a recovery plan.
“We are right on target with our recovery plans,” said Chairman and CEO Clifton Morris. “Our credit performance continues to improve, and our capital and liquidity position has never been stronger.”
One of the few independent loan providers operating in all 50 states, AmeriCredit forecasts new vehicle loans in the $4.5 billion to $5 billion range for fiscal 2005, up from $3.47 billion in the past fiscal year.
The publicly owned company has more than a million customers and $11.9 billion in managed auto loan receivables.