Multiple consumer groups have petitioned the Federal Trade Commission to deter “yo-yo” vehicle sales transactions. They want the agency to require that retail installment sales contracts declare the contract’s credit terms will stand regardless of a dealership’s ability to transfer the deal to a lender.
The request by the Center for Responsible Lending, the Consumer Federation of America, Consumers for Auto Reliability and Safety, the National Association of Consumer Advocates, the National Consumer Law Center and U.S. Public Interest Research Group would raise the “spot delivery” stakes for a retailer if adopted.
A spot delivery occurs when a customer takes delivery of a vehicle before a lender purchases the finance contract. It’s then up to the dealership to get the contract purchased as soon as possible, at the same terms agreed upon with the customer, which can be dicey.
The petitioners propose all auto finance contracts include a paragraph in capital letters declaring any terms calling the deal conditional null and void, and concluding with, “Once signed by the consumer, this credit contract cannot be withdrawn by the dealer whether or not this contract is assigned to a third party.”
Bradley Miller, National Automobile Dealers Association chief regulatory counsel for digital affairs and privacy, opposed the petition in a June 30 public comment to the FTC.
Under the proposal, Miller wrote, the dealer “would need to then ‘hold the paper’ themselves” if no lender bought the deal. “That is, the dealer would be a creditor that was servicing a loan.”
The FTC published notice of the petition in the Federal Register and took public comment through June, which opens the possibility of the agency developing regulations based upon the request.
“I think there is a strong chance this petition will prompt serious consideration,” Hudson Cook partner Jean Noonan, who once directed FTC regulation and financial practices enforcement, wrote in an email Aug. 8.
FTC commissioners had already shown concern about the topic, she wrote, and the groups’ request was “well prepared” — strong enough to meet the agency’s “reasonably demanding” standards for third-party petitions for consideration.
Noonan said she couldn’t remember any rulemaking in her 25 years at the FTC that began with a third-party petition. But she wouldn’t rule out the agency acting on this one.
“This is an extremely activist Commission, and the Supreme Court’s [2021 AMG Capital Management LLC v. FTC] decision limiting the agency’s remedies has produced a renewed and keen interest in trade regulation rule rulemaking,” she wrote.
With traditional indirect auto lending, the dealership serves as a middleman pairing a customer seeking credit with a lender looking for customers. The retailer extends the customer credit based on terms it expects would be amenable to a partner lender, then immediately sells the contract to that lender, perhaps receiving an incentive payment as well.
But if the retailer lacks confirmation a lender will purchase the loan, it might perform a spot delivery — permitting the customer to leave with the vehicle with the understanding that the deal might need to change or be called off if a taker for the loan at the terms discussed cannot be found.
The consumer groups say customers “overwhelmingly” don’t realize this caveat exists.
“The fundamental misrepresentation that the deal is complete … forces consumers into a ‘yo-yo’ scenario where they are called back to the dealership lot several times with demands to provide more information, potentially pay more upfront, and to change financing terms that were set forth and agreed to in the original contract, or to give up the car completely,” they wrote in a May 31 petition to the FTC.
The consumer groups cited lawsuits and arbitration demands against dealerships from customers related to spot delivery situations, and the National Association of Consumer Advocates added three other similar disputes in a follow-up public comment.
Unconfirmed financial terms described in a spot delivery deal undercut the Truth in Lending Act’s goal of a customer making informed comparisons of competing credit offers, the petitioners argued.
“The evisceration of disclosures and transparency of consumer credit transactions required under [the Truth in Lending Act] is one of the most fundamental and harmful consequences of the conduct this proposal seeks to address,” they wrote.
Odometer Act and Equal Credit Opportunity Act violations also are possible under spot deliveries, the petitioners said.
Miller said case law rejects the Odometer Act and Truth in Lending Act arguments. Customers understand that spot delivery deals are contingency-based, he said, and that they, not the dealer, are the ones asking for early access to the vehicle.
“What appears to be at the heart of the Petitioners’ concern is that many American automotive consumers, for a variety of valid reasons, need or want to drive away in a car that they wish to purchase before all financing contingencies are final,” Miller wrote. “The market has rationally addressed this consumer need by creating and using conditional contracts — that is, contracts that are final in all respects, save for final approval of the terms from a third-party finance source. The Petitioners assert that a conditional contract is, in and of itself, somehow harmful to consumers when the condition does not — for whatever reason — occur. That is not only unsupported, but it also ignores the utility and ubiquity of such agreements.”
NADA pointed out the FTC’s 2022 plan to regulate auto dealerships already contains language meant to crack down on “so-called yo-yo financing,” Miller said. NADA opposes those draft regulations too, but their existence makes the new petition redundant, he added.
The FTC’s proposal would classify as unfair or deceptive any dealership “misrepresentation, expressly or by implication” that states a “transaction is final or binding on all parties.” Keeping down payments or trade-in “charging fees, or initiating legal process or any action if a transaction is not finalized or if the consumer does not wish to engage in a transaction” would also be classified as unfair or deceptive.
