Factories and lenders are pushing dealers to sell their insurance products

Automakers and lenders are increasing the pressure on dealerships to sell their proprietary service contracts, prompting some dealers and general agents who sell independent products to push back.The tension has touched off court battles and prompted legislation and could lead to more of both.As showroom profits tanked during the auto downturn, many dealerships relied on insurance product sales to bolster sagging bottom lines. When F&I business was booming, manufacturers and their finance arms, as well as banks, credit unions and finance companies added affiliated service contracts and other aftermarket programs.In recent years, some factories and lenders have used their clout to get dealers to sell the products that make the automakers and lenders extra money. But dealers and agents say the pressure has grown after the credit crisis of 2008 and 2009. In an informal online Automotive News F&I survey in June, 74 percent of dealership respondents said they felt some pressure to do business with captive finance companies. A few examples of captive and lender product programs:-- VW Credit Inc. charges $150 on non-VW service contracts if the loan term is more than 60 months, its handbook says. A finance manager who wishes to remain anonymous says the captive also limits the price of a non-VW service contract to $1,600. There is no similar cap on VW service contracts, the manager says.-- Hyundai Motor America Inc. has required dealers to sell at least 10 percent of new-vehicle buyers Hyundai service contracts and other Hyundai products to qualify for co-op advertising funds.-- Credit Acceptance Corp., a national subprime lender, finances only service contracts from its providers, Wynn's or Southwest Re.-- Chrysler's dealer agreements and dealer standards require dealers to disclose to customers when they are selling a product that is not branded Chrysler.Lenders commonly are tighter fisted when funding competing products, requiring more money down than they would when financing their own products.In general, dealers want to choose which aftermarket products they offer customers, but they're reluctant to talk about the issue -- even anonymously -- because they fear retaliation from automakers and lenders.Lenders also decline comment on programs they consider proprietary.General agents, the middlemen who represent independent aftermarket products such as service contracts, have challenged lenders in court."The lenders determine which customers get approved, the amount of money they will advance for aftermarket products and which aftermarket products or providers they are willing to include in the amount financed," says John Braganini, president of Great Lakes Insurance Agency Inc. of Kalamazoo, Mich., which sells aftermarket products through dealers.While general agents are tackling the issue in court, dealers are seeking protection from state legislatures.State dealer associations in six states have lobbied successfully for added protection in their state franchise laws, says Jim Moors, franchise attorney for the National Automobile Dealers Association.Alabama, Nebraska and Virginia prohibit factories from coercing dealers to sell their vehicle service contracts, Moors says. Louisiana, Pennsylvania and, most recently, Idaho add to that prohibition the forced sale of other products, such as prepaid maintenance plans, he says.Jim Addis is general manager of Tom Addis Automotive Group, which operates Tom Addis Dodge and Lake City Ford in Coeur d'Alene, Idaho. As president of the Idaho Automobile Dealers Association, he helped lobby for the ban in Idaho."Certain dealers felt they were getting pressure to sell only the manufacturer's vehicle service contract," Addis says. "They were concerned that they wouldn't get as much allocation, that the dealers who sold the factory's contract would get preferential treatment."Addis, who works out of his company's Ford store, sells Ford's service plan, but he says he has felt no pressure from the company to do so.But, he says, dealers dislike Chrysler's "negative" disclosure policy. Dealers are required to indicate on the buyer's agreement that the service contract is not a Chrysler plan. The sale of Chrysler branded service contracts is part of an awards program."If you don't do what they say, they don't give you that reward," Addis says. "It can be $5,000 per quarter for a small dealer and probably $15,000 a quarter for a large dealer. That has a chilling effect on the dealer's ability to do business."Chrysler spokesman Ralph Kisiel says it's important that customers understand who is providing extended service coverage. "We have no plans on changing our policy. We have a vested interest in looking after the customer," he says. "We have found that customers who purchase Chrysler Service Contracts are more loyal to the Chrysler Group."Smaller dealers are the most vulnerable. High-volume dealers have more finance options, giving them enough muscle to negotiate favorable terms with lenders.Gary Allgeier is finance director for the Suburban Collection of Troy, Mich., the nation's 13th-largest auto retailer based on new retail unit sales. With 29 brands and 46 total franchises, his company has relationships with 50 lenders, including captives, and sells nine aftermarket products in financial services."We probably do not experience the same pressures as a normal dealership," Allgeier says. "Over the years, we have been encouraged by a few lenders to consider their products but not forced to sell them."He says Toyota Financial Services has heavily promoted its guaranteed asset protection, or GAP, program and would advance $200 more toward a purchase for its own GAP than it would for a competing program. GAP programs cover the balance of an auto loan if the vehicle is totaled or stolen. "We opted to continue with our current GAP anyway as the overall economics are still more favorable," he says.Other lenders play favorites with advance rates, too. According to the finance director at one Nissan dealership, Nissan Motor Acceptance Corp. will advance $2,500 or 12 percent of the cash price on a Nissan service contract but just 10 percent of the cash price or $2,000 maximum on other vehicle service contracts. On maintenance plans, NMAC advances double the cost for Nissan plans. And while it will advance double the cost for an outsider's plan, there's a cap of $750.Generally, though, Allgeier says, it is the subprime lenders that finance only their products, but Suburban Collection does little business with them. He says most of Suburban's lenders have been accommodating with their funding and terms.Allgeier says Ally Financial's dealer rewards program includes a component recognizing service plan sales, but it is a small part of total payouts. "Overall, their rewards program can be quite lucrative and is well-balanced with all of their offerings," he says.General agents who represent independent contracts have sued some banks for favoring affiliated service contracts and GAP programs.Early last year, automotive credit insurance provider Midwest Agency Services Inc. filed a federal antitrust suit against JPMorgan Chase alleging its policy on the sale of GAP discouraged competition.At that time, Chase Auto Finance said it would only provide retail financing through dealers who sold GAP programs from providers on an approved list. Chase's affiliate, Chase Insurance Agency Inc., was on the list, but Midwest was excluded from Chase's list of providers in Kentucky.Midwest argued that Chase used the list to coerce dealers into selling its affiliate's products.The U.S. District Court for the Eastern District of Kentucky dismissed the case. The case also was dismissed on appeal in July."A complaint alleging only that an individual competitor is injured, but not the market, does not establish an antitrust injury," the lower court explained in its opinion.O'Neil Financial Services Agency of Westerville, Ohio, successfully challenged a bank that refused to finance competing GAP products, but that was several years ago.In 2005, the Common Pleas Court of Richland County, Ohio, ruled that banks cannot "tie their loan to their GAP product to the exclusion of other vendors of GAP."Owner Tom O'Neil says he's asking general agents to join forces and contribute to a legal fund to file a test case against another lender. The details are undecided.While dealers have lobbied for franchise laws to protect them against potential coercion to sell proprietary aftermarket products, none of them has filed suit.Trent Wright, executive vice president of the Idaho Automobile Dealers Association, notes that for Idaho's legislative ban on coercion to have teeth, individual dealers would have to file suit or get the state's attorney to enforce the law.But Wright acknowledges dealers are dependent on the factories for their livelihood: "Nobody wants to sue their manufacturer." From / AutoNews