In May, NADA issued a memo stating that it had come to their attention that the FTC had recently issued civil investigative demands to dealers in connections with bi-weekly payment programs in the F&I office. They advised dealers to “exercise caution when offering such products to their F&I customers,” and gave an example of a 60-month auto loan in the amount of $27,342.96 financed at 8% over 60 months. The results were cited as a five-month reduction in term and an overall savings to the customer, after fees, of only $43.11. The NADA stated that, “Any situation where a dealer is offering a product of marginal value creates a risk that the product will be heavily scrutinized.” The memo stated, “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. As with any other product or service, however, if presented to consumers improperly, or in a misleading fashion, dealers could face numerous compliance risks.” It went on to say that biweekly products can be “particularly susceptible to UDAP (unfair or deceptive acts or practices)” because the costs of the program can easily exceed the potential benefits.
Citing the example of the loan with only $43.11 in savings to the customer, the NADA pointed out that if F&I personnel had promoted the program as offering “substantial savings” or used similar wording, then it could be viewed as an unfair or deceptive practice. They warned that the program’s benefits not be overstated by F&I personnel. The sole customer benefit of biweekly programs cited by the NADA in their memo was interest savings.
Needless to say, biweekly providers were immediately on the defense. David Engleman, CEO, SMART Payment Plan, says the most disappointing thing was the NADA’s neglect in doing proper research and due diligence. He says the true and accurate facts were not presented in their memo. “We want to make sure that all of the dealers who are selling SMART are being compliant. We provide thorough training and full disclosure of fees. It is disappointing that the NADA wouldn’t have reached out to ANY company in order to review sales and marketing materials, contracts, etc., before issuing an advisory or opinion memo regarding a service.” Engleman says dealers should expect more from the NADA – including accurate portrayal of facts and conducting necessary research before issuing legal and regulatory opinions.
Engleman, along with Michael Hull, CEO, Equity 4 U, Inc., Lynn Simmons, president, Economic Advantages Corporation, and Robert Steenbergh, CEO, US Equity Advantage, - none of whom had been contacted by the FTC - issued a joint response stating that the NADA memo “raised undue alarm” and missed much of the true value of their services, such as “convenience, ease of budgeting, improved cash flow, faster loan payoff, reduced negative equity, the elimination of late fees and the significant interest savings when consumers add additional loan payments.” In addition, the providers were upset by the NADA’s failure to communicate with any of them prior to issuing the memorandum.
In a separate letter to the NADA, Hull states that the NADA’s omission of the full benefits of the program greatly skew the decision making process for the dealer. His letter states, “If I were a dealer with average knowledge of biweekly payments or payment acceleration, I would believe the only net benefit, as you [the NADA] stated, is interest savings. If that were the case, then I wholeheartedly agree it [would be] difficult to find a positive net benefit for every customer.” He goes on to say that fortunately, their customers and partners “understand the FULL benefits of the program, which includes a better equity position.”
All the Benefits of Biweekly...
Simmons says, “The original memorandum really did not do justice to our industry. Everyone agrees that the NADA did not do any due diligence. Their memo just made people nervous! Nobody needs that. …This is a great product and a revenue generator. There is no reason to stop selling it. As long as you do your job and disclose things properly, there is no problem.” Economic Advantages Corporation issued their own letter to the NADA and Simmons listed the following additional benefits omitted by NADA:
- Accelerated equity – significant reduction in the loan amount due at payoff
- Automated payments – offering the consumer an easy, effortless payment method
- Increased trade-in value – resulting from earlier payoff, reduced wear and tear and less mileage
- Flexible budgeting – smaller periodic debits which can be customized as needed
- Structured discipline – ensures timely payment which can improve credit standing
- Customer support – professional service reps who assist the customer in communicating with their lender, with which they often do not have the experience
- Online account access – enabling the customer to track their payments and easily communicate with the company day or night
- Additional debt – ability to add mortgage, credit card, student loan and other debt types for even greater savings and convenience
While the companies are referred to as “biweekly” payment programs, Simmons pointed out that in reality, biweekly providers tailor their services to the customer’s preference. “We can debit our clients on any schedule they like – whether its weekly, twice monthly, monthly, or biweekly. It started out many, many years ago as a biweekly product but it has evolved – the name just stuck.”
Engleman pointed out that 80% of Americans get paid weekly, biweekly or twice a month. “There have been three recent surveys that indicate that up to 77% of Americans are living payday-to-payday. Understanding that makes it obvious why a service that matches bill payment to a payday would be so popular. It’s the convenience, the ease of budgeting, and the improved cash flow that makes our service popular with Americans. It’s not interest savings! Interest savings is one of about ten benefits and not the most important one. When we survey our clients, not a single client has ever responded that interest savings was important to them or that savings was a factor in the enrollment in our services. The overwhelming service from our clients is that they love our service – and they use the term ‘love’ – for the convenience, ease of budgeting and improved cash flow.” As an example, he explains that the average American makes $4000 a month. They receive a paycheck for $2000 at the beginning of the month and another one in the middle of the month. The government takes $500. The average rent or mortgage is $1000. The average car payment is $400. Often times those are both due at the first of the month, leaving the individual with only $100 left to live on after paying those bills, until their next paycheck. “People are not buying interest savings, they are buying ease of budgeting and convenience and cash flow.”
Biweekly customers can reap even greater benefits by rolling additional outstanding loans into the program they enroll in with their auto loan. Hull says, “Think about your home. Imagine that you are using a biweekly payment schedule and decide to sell your house and move after ten years. At that point, because of your biweekly payments, you will have thousands of dollars more available to you when you sell your home and repurchase a new one. You can either buy a similar home for less money or you can buy a bigger house. The same goes for cars. In five years imagine you trade in a vehicle that you still owe a couple of thousand dollars on. If you had not been on the biweekly program, you might have owed four to five thousand! That’s a huge equity benefit.”
Training and Compliance
The one thing that biweekly providers all emphatically agreed with was the NADA’s recommendation for proper training of F&I personnel and the importance of adequate disclosure. In fact, the biweekly providers we spoke with say they already go above and beyond in this area. Steenbergh says their focus on compliance is top priority. “There are no hidden fees whatsoever. We don’t apologize that we charge a fee for our service. There is no reason to hide it.” He reports they comply with all 50 states’ licensing laws and are registered with Financial Crimes Enforcement Network (FinCEN), which is a federal regulatory agency. They passed internal audits by the MSD compliance divisions of their banking partners, comply with all federal bank secrecy acts and anti-money laundering statutes, which are required by the state licensing authorities as well. In addition, they have operated with externally audited financials for a number of years. Steenbergh says, “We are not afraid of anyone challenging whether or not we do something in an honest and compliant manner because we think that is a competitive advantage for us. We don’t spend all this money on licenses and compliance because it is an income source!”
As far as dealership training, the biweekly providers we spoke with take that very seriously also. Steenbergh says maintaining control of the training is a important part of keeping things consistent and teaching the importance of disclosures and compliance to dealers. “We don’t have other people train our dealers. Even though we work with agents across the country, we send our own people in to do the actual dealership training. This ensures that it is done in a compliant manner and that each training is the same as the last. Our trainers work with dealers on the proper way to present the program, how to handle objections, and they specifically tell them how NOT to present it.”
Michael Lickfeld, vice president, Lawly Automotive in New York has been doing field training for Equity 4 U for almost nine years. He says he has never had any calls from the BBB, attorney letters, lawsuits or other problems since he has been selling Equity 4 U’s products. When training dealers, he takes the F&I chair and gives the presentation to the F&I manager as if they were the customer, going through every step of the process, including fees and benefits and highlighting key areas on the paperwork. He returns to his dealers one to four times per month, depending upon their size, to conduct ongoing training. On these follow up visits, he sits in the customer chair and has the F&I manager present to him. He provides tips and ensures they are fully and accurately representing the product. Lickfeld says the key is, “putting yourself in the customers place – or view them as if they were your mom or dad or a relative. How would you treat them? You have to make them aware that there are fees and there are benefits and fully explain both to the customer. You are putting them in an accelerated equity position on their loan.”
Rick Christopher, regional account manager, US Equity, did business with US Equity for eight years before working for them. He says he never had any customer or dealership issues, such as customers not knowing what they were getting once they signed up, or problems with the program once they were enrolled. He says there is no way an F&I manager can overstate the benefits if they use the tools provided to them. “When we train - new accounts or new F&I managers, we stress full disclosure, especially of fees. We want the customer to understand that the benefits far outweigh the fees. All the fees are on our disclosure form in bold. I train F&I managers to have customers actually initial fees section of the enrollment form as a best practice. We stress for them not to overstate the benefits of the program because we have a tool on our website and a tool in MenuVantage that states the benefits to the customer very clearly in a printable format. This includes the interest savings (if there is any), the additional equity they will have available to them in 42 months, and the term reduction on the loan if they stay on the program. It shows the customer clearly what their savings will be after the $399 enrollment fee.”
“I think what’s important here, is we really are no different than any other product in the marketplace,” says Simmons, “With any product F&I sells, it’s up to them to present it properly and it’s up to the provider to train F&I to present it properly. We make sure our agents are well aware of how our product works and then together with the agents we work to keep the dealers educated on our product.”
All the providers we spoke with conduct regular training – in person and online with webinars and tutorials. They provide training materials and offer online and phone support for dealers as well as customers and have a variety of calculators, tools, debit calendars and account information on their websites. Their goal is having customers for life. They emphasize providing quality customer service in order to earn long-term business from their customers.
A Silver Lining?
While no reputable company enjoys having to defend itself against accusations that they are not operating above board in their business practices, the biweekly providers we spoke with are being positive in light of the recent press they have received due to the NADA’s memorandum. They say they are using the opportunity of being put in the spotlight to refocus and to share the benefits of their products within the F&I industry. “Equity 4 U and the other providers,” says Hull, “have been providing payment acceleration services for over a decade, with predominantly positive customer feedback. We know how to sell, train and market the services because we have the experience to do it. If the FTC or for that matter, NADA has any input as to the process of biweekly payments, I would be more than happy to listen and makereasonablemodifications to our services.”
Hull says they are using the opportunity to refocus and reinforce the items that need to be brought up so the customer has an accurate understanding of the services they are signed up for - even with their experienced F&I managers – to ensure that nothing has fallen through the cracks. “I don’t think anyone is out there intentionally misleading anyone. A lot of the principles that are inherent with our program are not new. People have been doing this with their mortgages for decades and biweekly has been offered at the dealership level for over a decade.”
Engleman say that if anything, the NADA has provided a podium to inform the marketplace of the very important and critical details of their service. “It is what it is,” says Engleman, “We at SMART do not want to focus on the NADA memo. We are very happy that we are getting the press and the media attention. It gives us opportunities to discuss all the facts, the details of our program, our focus on compliance, adequate training, and accurate fee and benefit disclosures.”
At the end of the day, while they disagree with the recent memo, Engleman says reputable biweekly payment services are directly aligned with the NADA’s ultimate goal. “We want dealers to be compliant, we want them to use legal, compliant sales practices and we want to make it possible for car buyers to interact with dealers in a high trust environment and to be able to buy vehicles, products and services that make it easier to own vehicles and help those buyers return to dealers in a more right-side up position.” So despite the reason biweekly payment services were put in the spotlight, he views it as an “opportunity for the industry as a whole” – to educate dealers about the benefits of their services and to let the industry know just why payment services that align payments with customers pay days are so popular with the public.