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New F&I Products Require Renewed Focus on Compliance

By moconnell on 7/2/2018

By Jay Howard Compliance & Administrative Services Manager

The tumultuous 2017 Texas Legislative Session was fraught with political intrigue and partisan infighting, but lost in the dramatic battles over budgets and bathrooms were several bills that could have lasting impacts on F&I offices across the state. Last summer we summarized for our readers five of those bills that became law in 2017 with the potential to affect the sale of add-on products by dealers.

Two of the laws in particular have created the opportunity for dealers to offer new products to their customers in the F&I office, and those products are quickly coming to market. Senate Bill 1199 amended the vehicle service contract statute (Tx. Occ. Code, Ch. 1304) to add a specific type of contract called a depreciation benefit optional member program. House Bill 2339 created a new type of product called a trade-in credit agreement under the motor vehicle finance statute (Tx. Fin. Code, Ch. 348).

These new products have already found their way to the market in Texas, but dealers need to make sure they’ve educated their F&I personnel to understand the products and the regulatory requirements associated with selling these new consumer contracts.

PowerBuy

Depreciation benefit service contracts are currently being marketed in Texas as the PowerBuy Depreciation Program by Service Group. Like GAP, PowerBuy provides a benefit to the customer upon the constructive total loss of their covered vehicle. However, unlike GAP, the PowerBuy benefit amount is calculated as the difference between the original purchase price and the primary carrier settlement, and the benefit is only provided as a credit toward the purchase of a new vehicle at the original selling dealer.

Dealers should refer to their product providers for specific contract and benefit terms, but there are a few key compliance issues to keep in mind when considering F&I compliance for these products.

The Office of Consumer Credit Commissioner (OCCC) has issued an advisory bulletin summarizing the regulatory requirements for these contracts. The bulletin clearly identifies that charges for PowerBuy and other depreciation benefit service contracts should be listed as an itemized charge in line 4.O. of the retail installment contract. Additionally, the charge for the contract must be “reasonable in relation to the benefit provided,” and the product must be cancellable and include a 30-day “free look” period.

When customers return to the selling dealer to claim their benefit amount, dealers should be sure to disclose the benefit amount on the retail contract on the “Other” line of the down payment section and identify the amount as a “depreciation benefit.”

Finally, since the depreciation benefit contracts are regulated by Chapter 1304, dealers will need to ensure that their F&I personnel are complying with all of the same regulations that apply to typical vehicle service contracts.

Diminished Asset Protection

Diminished Asset Protection (DAP) is a product from Safe-Guard that falls under the newly created statute for trade-in credit agreements. DAP provides a trade-in credit to customers whose vehicle trade-in value has been diminished because it was involved in a collision. The calculation of the benefit is based on several factors (dealers should refer to their provider for specific benefit information), but, like PowerBuy, customers must return to the selling or affiliated dealer to obtain the benefit.

Once again, the OCCC has issued a helpful advisory bulletin for this type of product. Much like the PowerBuy-type products, charges for DAP or other trade-in credit agreements are to be disclosed on the non-taxable line 4.O. of the retail contract. However, trade-in credit agreements are subject to several additional regulations. For example: the maximum amount charged for a trade-in credit agreement may not exceed 5% of the amount financed.

DAP and PowerBuy are part of an innovative, growing market for F&I products, and it will be essential for any dealership to ensure they are prepared to comply with the regulations surrounding each product.

[Service Group now markets DAP and PowerBuy in their full line of F&I product offerings, and The Academy provides sales and compliance training for all F&I products.]

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