Texas Regulators Pursue Enforcement of Ancillary Products

DALLAS — New ancillary product offerings approved by the Texas legislature last fall have drawn the attention of local regulators to the effectiveness of all automotive service contracts sold at dealerships, panelists noted at the Auto Finance Performance and Compliance Summit.

“One of the issues we see routinely is that on the front end, there is quite an appetite or vigor to sell certain products, and the dealers want to sell those products because it’s more revenue, and the [lenders and other] holders wind up dealing with these as they collect payments,” said Rudy Aguilar, director of consumer protection in the Texas Office of Consumer Credit Commissioner (OCCC).

The state regulator has fined dealers and lenders for selling ancillary products when they provide no value to consumers. Specifically, guaranteed asset protection policies are most valuable when customers make less than a 20% down payment, Aguilar said.

One of the new products introduced in Texas — a depreciation benefit contract — allows consumers with larger down payments to retain more value out of the contract, especially if they are purchasing luxury vehicles, he added. Additionally, the OCCC is seeking consumer restitution when refunds for contracts that are terminated early are improperly funded.

“Where we feel those issues are systemic, we may ask for a review of products going as far back as four years,” he said. “We have found significant dollar volumes of restitution in those situations.”

Several lenders have had to pay restitution to consumers nationally for GAP product refunds, but these enforcement actions extend to all ancillary products, said Kenneth Rojc, managing partner in Nisen & Elliott LLC’s automotive finance group. Lenders should be reviewing their processes for “service contracts, vehicle protection products, theft protection products, and even some newfangled products that came out in Texas for the first time,” Rojc said.