DATE: July 25, 2002

TO: Dealers, General Managers and F&I Managers

FROM: Mark S. Krejci

RE: Legal Update: Menu Package/Interest Rate Negotiation

In the July 15th, 2002 issue of Car Dealer Insider, an excellent article was written advising dealers to "avoid reworking rates to sell menu package options".

An example was given where a business manager disclosed a customer's base monthly payment, vehicle price, interest rate and loan term. In this situation, the customer wanted to buy a menu package option but thought it added too much to their monthly payment.

The key question is, can the dealership adjust the interest rate downward to allow room in the deal for the cost of the menu package?

No, said the attorney and the F&I consultants contacted by Car Dealer Insider. "It misrepresents the optional nature of the products," says Doug Walsh, a senior consultant for the Washington state attorney general's office. The reason: Because you reduce the rate to sell the products, the cost of the product effectively becomes part of the cost for securing the financing. And, if you don't disclose it as such, you're violating the Federal Truth in Lending Act.

Car Dealer Insider also raised another issue --- rate adjustment. Rate adjustment raises questions about how you arrived at the initial interest rate, said Jeffrey McGrath, assistant district attorney for Los Angeles County and lead prosecutor in the F&I case against Gunderson Chevrolet (Car Dealer Insider, Issue 4/30/01). Car Dealer Insider stated that regulators would look to evaluate the spread between the buy rate and customer interest rate - and whether there's a consistent practice of significant mark-ups. "It's like payment packing," said Jeffrey McGrath.

Additionally, it was asked what would happen if you decided to discount the retail price of products in the menu package, rather than adjust the interest rate, to make room for the customer to purchase the menu option?

In theory, this approach works, stated the attorneys to Car Dealer Insider. But some state laws, such as Florida, regard F&I products such as service contracts and credit life policies as insurance. In addition, Florida law now includes anti-theft etch products (Vehicle Protection Products) and tire & wheel guarantees as regulated products under Section 634 of the insurance code, with the requisite filings of retail pricing that cannot be adjusted up or down without violating the law.

As I see this, the overall point is that you cannot change interest rates to sell products. So, whatever interest rate(s) you quote in the menu cannot be reduced to sell the additional products.

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