Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Mar 28, 2012

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The recent success of the auto loan industry has given hope to a nation growing tired of economic woes. When the mortgage and student financing industries place a heavy burden on every tax payer in the country, hearing about the success of those originating auto loans is something similar to a sigh of relief. But some of the items contributing to auto lenders success may begin to come under fire, as observed by an article.

Speakers at the Consumer Bankers Association convention that was held in Texas last week raised questions and concerns regarding three specific areas that some fear may lead to the auto loan industry’s demise: feature bundling, dealer tricks, and customer complaints.

Packaging Features in Bundles

More and more dealerships are packaging aftermarket products in large bundles and selling them as a group instead of pricing each product individually. On the surface this sounds completely harmless, but to regulators, it’s anything but.

Aftermarket product bundling refers to the packaging of warranties and insurance policies of sorts. Consumers with an auto loan in hand can choose to add the bundle to the price of their car and in return receive services such as windshield repair, dent repair, free tire replacements, and other wear-and-tear fixes.

The problem with bundling is that regulators are finding auto dealers marking up the prices of their prices by large sums—and since the products are bundled, consumers don’t see the individual costs, nor their markups.

Charlie Robinson, COO of Resource Automotive, told AutoNews that he recommends the price of a three $300 product bundle to be $1299—a $399 markup.

“Aftermarket products should not be bundled in such a way as to obscure relative costs,” said Doug Ekizian, a senior manager of the Consumer Finance Group at PricewaterhouseCoopers, to AutoNews. “The total cost of a product, including interest, points and fees, should be easy for a customer to understand.”

As of now, those costs are not easy to understand since, at most dealerships, they’re entirely hidden.

Dealer Scams

Unless consumers pay to see a magic show or unless cameras are revealed and a good looking host tells them they’re now on television, people don’t like to be tricked. This holds particularly true when tricks involve a consumer’s finances. Some experts believe auto dealers’ tricks have been flying under the radar, but are soon to be squashed flat by the government.

The Consumer Financial Protection Bureau (CFPB) was established in 2012 by the Dodd-Frank act to regulate the lending industry and protect borrowers. While the CFPB has made it very clear that the mortgage, payday, and student lending industries would be under careful scrutiny, the auto loan industry has somehow evaded many of the press conferences and speeches made by Richard Cordray, the CFPB director.

But that’s due to change. The CFPB is now hosting an open forum on their website to gather information about how consumers have been victimized. As more and more dealer scams are brought to light, the CFPB will gain momentum in their pursuit to crush predatory lending practices.

Some of the practices that have been revealed so far are dealer reserves, yo-yo financing, and “option packing.”

Dealer reserves refer to the kickbacks dealers receive when they help originate auto loans. Unsuspecting or uninformed consumers who venture into a car lot to purchase a vehicle are often hounded to finance their auto loan through the dealership. What consumers often don’t know is that the interest rates offered by dealerships are almost always marked up by a few percentage points so that the bank can pay a “finder’s fee” of sorts to the dealer. Of course none of this is disclosed, and that naturally upsets consumer advocate and consumer protection groups.

Yo-yo financing is a cruel bait-and-switch tactic that tricks consumers into signing financing deals for more expensive auto loans. When a dealer practices yo-yo financing, they allow a borrower to “purchase” a vehicle at an agreed-upon price, but with the caveat that the agreed-upon price is contingent to a credit check that will take place in the next few days. The consumer believes he’s getting a deal, signs up for an auto loan, and takes the car home.

After driving the vehicle around for a few days, showing it off to friends, and maybe even selling their old vehicle, the borrower receives a call from the dealer. After explaining that the borrower didn’t meet the credit requirement, the borrower is forced to drive back to the dealer and either hand over the vehicle or sign a contract for a higher price. Not wanting to face embarrassment or, if the borrower’s original vehicle is now sold off and gone, being stranded, the borrower often agrees to increase his auto loan payments.

Finally option packing refers to the practice of packing vehicles with tons of unwanted upgrades that consumers must pay for if they want a particular vehicle. Traditionally, options are supposed to be exactly what their name entails: optional. They are upgrades and thus more expensive. But some dealers are packing all of their vehicles with options, so that if a consumer is interested in a vehicle, he or she must agree to a larger auto loan for the option packed version since no other version exists on the lot.

These are but a few tactics employed by some auto dealers trying to suck extra money out of their clients, but as a result, dealers have begun to draw the ire of the CFPB.

Customer Complaints are Rising

In order to gather further intelligence about the CFPB has opened their complaint page. This page is open to anybody who would like to share their experiences with the protection agency, and those complaints will be used to identify problems with the auto industry.

The CFPB has said they will consider every single complaint they receive and, if a complaint warrants action, they will contact the auto dealer or auto loan lender and demand a response.

As all of these tactics and stories are revealed, the next report on the auto industry’s growth will be interesting to see. It will be wonderful for our recovering economy if those numbers continue to rise. Likewise, it will be great for the individual consumer if we see them fall, since that will be telling of a crackdown on these poor business tactics.