If state legislatures can enact maximum dealer loan markup “caps,” what's to stop them from mandating maximum or minimum dealer discount rates?
Or maximum time charges for service work or markups on over-the-counter parts?
State insurance commissions regulate carriers and the rates and coverage they offer. They also regulate insurance agents by requiring them to be licensed.
Dealerships sell insurance, too, for credit life and health that can cover loan and lease premiums and Guaranteed Auto Protection covering the difference between a car's value and what's owed on it in the event it is totalled in a wreck.
Finance & insurance managers who sell credit life policies and GAP are not licensed since no casualty coverage is involved. But the actions of state legislatures, in considering rate caps for the first time on dealers' auto loan markups, could usher in further dealership regulations.
Fearing that, Bob Israel, the Louisiana Automobile Dealers Assn.'s executive vice president, staged a preemptive strike in the Bayou state's legislature.
Responding first to the backlash from F&I “packing” suits and settlements in 2003 and 2004, the Louisiana association backed a proposal to cap dealers' vehicle loan markups at 3%.
This ceiling was about at the level called for in settlements reached by captive lenders General Motors Acceptance Corp., Ford Credit and Nissan Acceptance as defendants in the “packing” suits.
Why did Louisiana dealers do it?
“Our concern was if we waited for legislators to initiate a cap bill, it would be negotiated down and down,” Israel explains, “and other restrictions on F&I practices might be added to the bill.”
Louisiana's lawmakers passed the capping bill with minimal opposition. After all, it certainly is a boon for consumers, as compared to the higher rates that dealers had charged in the past.
That dealers feel entitled to charge higher commissions for processing loan applications, as National Automobile Dealers Assn. Chairman Charley Smith contends, became an unsustainable position once publicly owned dealer groups joined captive lenders in agreeing to low single-digit interest-rate markups.
In Sacramento, where the California law mill grinds away, Israel's prediction of legislators using a rate capping bill as a foot in the door to further regulate other F&I practices was plainly on the money.
To a rate cap clause were added the following proposals in the Golden state:
- Used-car buyers would be allowed to return their vehicles for a full refund, minus mileage charges, within three days of closing (deleted when the California Motor Car Dealers Assn. objected to dealers becoming, in effect, rental depots).
- Credit scores, usually withheld from purchasers, now will be disclosed.
- A clause on certified pre-owned vehicles sets forth certain standards that must be met.
- Loan markups, which an original version banned altogether, are capped at the GMAC formula of 2.5 percentage points for five-year loans and 2 points for longer loans.
- Costs for service contracts, anti-theft systems and other F&I-negotiated products must be disclosed.
The legislation didn't impose a licensing requirement on F&I managers, but Peter Welch, head of the California dealer association, declared that the bill will reduce dealer profits substantially in a high-risk financing business, and therefore “dealers won't take the time to qualify high-risk people because the risk won't be worth the reward.”
Are the rate cap bills a step in the direction of further F&I regulation, including licensing? The California action underscores the trend that could develop in a climate where hard-pressed dealers are on the defensive against “consumerist” interests.
Taking the initiative, as Louisiana dealers did, could forestall efforts to curb markups in other departments of the dealerships or subject F&I managers to licensing requirements. California legislators seized the opportunity to add other curbs to their rate-cap measure. That didn't occur in Louisiana.
Mac Gordon is the dean of U.S. automotive writers. He can be reached at [email protected].