On May 8, the auto finance industry was rocked by a memo issued by the National Automobile Dealers Association. The NADA warned dealers that the Federal Trade Commission has undertaken a probe of biweekly payment programs. The FTC had apparently issued a number of civil investigative demands to dealers; in brief, this action may require the recipient to answer questions or produce documentation but does not require the government to initiate a lawsuit.
The memo stated that dealers must not overemphasize the benefits of such programs, which automatically deduct biweekly payments from the customer’s bank account, effectively paying half of each month’s payment ahead, thus reducing the amount of interest paid over the life of the loan. Dealers earn a per-copy fee by selling the programs in the F&I office, but do not participate in the program; the customer signs a separate agreement with the provider.
The plot thickened significantly on the second page, where NADA analysts provided a breakdown of benefits based on a $27,342.96 auto loan paid back over five years and augmented by a biweekly agreement. The hypothetical car buyer paid $399 for the service, as well as a per-payment fee of $1.95. The fees added up to $613.50 and the customer saved $656.61 in interest, a difference of a little more than $43.
There were more barbs. The memo described biweekly programs as “not inherently ‘illegal’” and noted there was nothing preventing car buyers from paying ahead of their own volition. If the fees were any higher, the NADA warned, there would be no benefit at all.
Reaction from providers was swift. Within hours, executives from EAC, Equity 4 U and SMART Payment Plan had issued sternly worded replies, for which we created links on our online news report. Robert Steenbergh, founder and CEO of US Equity Advantage, summarized their stance in an interview with ADM’s Gregory Arroyo.
“It is disappointing and apparent that the NADA has written this opinion without any in-depth conversation with a credible biweekly provider,” Steenbergh said. “That being said, and to address their points, very few people attempt to try this process themselves (estimates are between 2% and 5%). And for those who do, the reality is that all lenders apply extra payments differently.” Steenbergh offered additional salient points, including the fact that vehicles are a depreciating asset — car buyers who pay ahead to decrease their negative equity are in a better position when they return to the dealership.
The nature of the FTC’s curiosity about biweekly payment programs is not yet known. That may be one reason why the NADA rushed to issue the memo, if that is indeed the case. The association has little interest in depriving dealers of any revenue stream, including a proven F&I product. Their job is to protect their members’ entire operation.
There will be much more to discuss as this story develops, but let us not lose sight of the one benefit of these programs not mentioned in the early stages of the conversation: Whatever other benefits we may wish to debate, biweekly payment programs offer built-in assurance that the car buyer’s monthly obligation will be met. SMART Payment Plan’s written response summed it up thusly:
“The most important benefits for our clients are convenience, ease of budgeting, paying off debt faster, reducing negative equity and eliminating late fees,” the statement read, in part. “When we survey our clients, they say they love us for the convenience and ease of budgeting — not a single client mentions interest savings.”
Anything that keeps the payments rolling in is a benefit to all parties, and I agree that few customers would make similar arrangements on their own. The logical extension of that argument is that a good number would miss a significant number of payments if they weren’t made automatically.