Consistency is Key
By Steve Roennau
In December 2013, the Consumer Financial Protection Bureau (CFPB) ordered Ally Financial to pay $80 million in civil penalties over Ally’s allowance of dealer markup. This represented the federal government’s largest auto loan discrimination settlement in U.S. history. Between 2013 and 2016, the CFPB has issued several new advisories, finalized settlements with BB&T, American Honda Finance Corporation and Toyota Motor Credit Corporation (TMCC), and forced numerous other automotive financial institutions to significantly modify their lending businesses.
Of the many lenders who anticipated a CFPB investigation, TMCC was arguably the most prepared, having completed a very thorough overhaul of its compliance procedures based on CFPB industry recommendations. However, it appears that the CFPB’s approach of using lenders to regulate dealers has only resulted in sweeping caps on dealer reserve.
. After all, the auto industry won a small victory over the CFPB in November when the House passed the Reforming CFPB Indirect Auto Financing Guidance Act. In its current form, the bill would nullify the CFPB’s “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” bulletin, which instructed lenders to eliminate dealer pricing discretion, or constrain dealer pricing discretion by monitoring dealership practices and using “controls” to force dealerships to adjust their practices.
This bill is by no means law – and could face revisions before it passes in the Senate. So, until the bill is in final form, we recommend that dealers take stock of the current auto lending compliance practices.
Luckily, there are a few simple steps you can implement tomorrow to get your dealership on the path to compliance.
1. Identify a Compliance Leader
Identify a compliance “owner” to be responsible for regular compliance training, new employee education, auditing F&I processes daily. They should review your deals daily, and check for things like signed menu disclosures and consistent rate markup. While they should have in-depth knowledge of the F&I process, they should not be an F&I manager or associated with the sales process. Ideally, this should be a separate role within your dealership focused purely on operational compliance.
Send your compliance leader – and F&I managers – through compliance training like the Association of Finance and Insurance Professional’s (AFIP) certification course. This team must be fully versed in national, state and local regulations to be effective.
2. Put Procedures in Writing
You may already have F&I processes in place – but are the specific procedures in writing? If not, they don’t exist. Document each step of the process and have the compliance leader review it for potential holes. Daily monitoring of your menu use can catch issues quickly.
Defined consequences for failing to comply with dealership policies should also be in writing. Employee remediation is much less expensive than a lengthy audit, a potential lawsuit and staff reduction.
3. Ensure Consistent Rate Markup
Now is also the time to ensure consistent rate markup by implementing NADA’s Fair Credit Compliance Guidelines. While the CFPB initially preferred a flat rate or a fixed percentage of the amount financed for dealership compensation, their settlements with Honda and Toyota allowed NADA’s guidelines to be implemented with a reduced dealer mark-up.
Dealerships should also work with their legal counsel to implement a version of NADA’s guidelines to protect their relationship with the majority of auto lenders.
4. Provide Transparent, Consistent F&I Product Pricing
Review your F&I product pricing models to ensure it is consistent for customers. Since 2011, the FTC has brought more than 25 cases challenging illegal practices in the area of dealership business. These cases, combined with the CFPB’s investigation into auto financing, have prompted the FTC to take a closer look at the retail automobile industry.
Also, take stock of your dealership’s financing and aftermarket pricing. These days, it’s easy for consumers to research vehicle prices. But most consumers have no idea what they qualify for, and what competitive pricing looks like when it comes to researching financing, vehicle service contracts, and other aftermarket products. However, this is rapidly changing. While dealerships have capitalized on this knowledge gap for years, consumers and entities like the CFPB are now stepping in and saying, “No more.” Today’s consumers demand transparency.
One of the easiest and most efficient ways of creating transparency is an online credit application including financing and aftermarket information. Providing this information up front allows consumers to self-educate while they are doing their vehicle research.
All of this begs the question, how competitive are your products, financing and pricing? Work with your product provider to truly understand the consumer benefits of the products you offer. Compare benefits to the suggested retail price, with the question, “Are my customers receiving good value for what they paid?” Look beyond dealership profit from aftermarket products to consumer value and find a good balance. Evaluate your pricing structure to determine how you can create a uniform pricing model for your F&I product menu.
5. Utilize a Complaint Management System
Put in place a complaint management system where complaints, online and offline, are reviewed by managers and addressed directly. You don’t have to provide free services/discounts to every complaint, but just demonstrate your willingness to listen and address concerns. A holistic view can help you identify patterns of issues and address them through training, or even talent recruitment. A good measure of customer satisfaction and your dealership’s future profitability capability is a comparison of your dealership performance metrics and your CSI score, online customer reviews, and chargebacks. You want to see a picture where those metrics and CSI scores are aligned. Remind your teams that the customer experience is paramount to a successful dealership.
6. Audit, Audit, Audit
Lastly, consider implementing recurring, random audits to ensure your team is complying with local, state and federal laws. Are they complying with OFAC, red flags, risk-based pricing, etc.? You won’t know unless you audit. Your compliance leader can manage this on a regular basis so you can address discrepancies before they become serious issues. Moving ahead, expect that banks, captives, finance companies, etc. will ask for your written policies and procedures, as well as documented training, as they prepare for CFPB investigations.
While the road to compliance is long, it’s possible to gain significant headway quickly by applying the steps provided. You can begin implementing these strategies today. However, just like establishing a good habit, they will take time to form into a cohesive compliance platform from which you can build lasting and effective operations.