Next Limitation On F&I Departments

Limitation On F&I

U.S. Bank acts before CFPB can, but dealerships may be more amenable than with government intervention on APR.


A second front may be opening up in the battle against the way dealerships have been pricing F&I products for customers – and this time, the private sector is taking the lead rather than the federal government causing limitations on F&I.

Minneapolis-based U.S. Bank, the country’s fifth-biggest commercial bank with $410 billion of assets and branches in 25 states, raised eyebrows in dealership circles in May with a notice to dealerships that distribute its F&I products. That notice, according to an F&I and Showroom magazine story, let dealerships know the bank would now be monitoring the underlying pricing of products – while all the attention until now has focused on the Consumer Financial Protection Bureau’s proposal to stop dealerships from negotiating on APR.

U.S. Bank apparently has concerns about CFPB policy interpreting federal fair lending laws to address not only intentional discrimination but also “certain neutral practices that have an adverse discriminatory impact on a prohibited basis (i.e., disparate impact).” And, the bank worries about the implications for more products than just auto loans.

“If this monitoring program finds unexplained differences in pricing or excessive add-on product financing on a prohibited basis, then we will notify you,” the U.S. Bank notice read, according to F&I and Showroom. “We will ask you to provide any additional information that you believe we should consider regarding the matter. If you are unable to provide an explanation for the identified differences, or if the unexplained differences persist, we will consider taking further action.”

That would mean U.S. Bank would preclude its dealership partners from negotiating with different customers on the underlying pricing of extended service contracts and GAP insurance, among other products. The bank is letting dealers know it won’t allow even the appearance of impropriety or unintentional discrimination.

Handcuffs On APR Already Faced

Dealerships already have been trying to digest a 2013 CFPB guidance document that seeks to prohibit F&I departments from negotiating on APR for customers seeking to finance a vehicle purchase, which the Board says leads to riskier loans being underwritten. The CFPB believes it would be more prudent for lenders to compensate dealerships with a flat fee.

However, this plan has fueled criticism that the CFPB is overstepping its authority established by the Dodd-Frank reform bill of 2010. NADA and several other automotive trade groups are backing federal legislation that would force the CFPB to rescind its guidance and consider other options.

Other Lenders Could Follow

On this issue of the base pricing of F&I products and different prices for different customers, other financial services companies are almost certain to make the same choice that U.S. Bank did out of an abundance of caution, the vendor and dealership veterans interviewed for this story believe.

“U.S. Bank is taking a very proactive approach,” said Tony Dupaquier, who runs the national training academy for Service Group, an Austin, Texas-based supplier of F&I products to dealerships. That’s a prudent policy, he said, given the vagueness inherent in the CFPB’s use of guidance memos.

“There are no direct recommendations from CFPB. They let everybody figure it out for themselves – and everybody gets in trouble.”

While some observers might characterize U.S. Bank’s tactics as an overreaction (after all, it’s by no means completely accepted that the CFPB is authorized to regulate automotive F&I products), neither can the potential that this is the first domino to fall be dismissed.

Some Think It’s Time To Change

“While the argument over CFPB’s authority is going on, it’s well worth it that we, as an industry, discuss how we’re going to address it,” said Larry Dorfman, CEO of Norcross, Ga.-based EasyCare, a provider of vehicle extended warranties, key replacement coverage and other F&I contracts.

That discussion, Dorfman believes, should include F&I products vendors and dealerships asking themselves whether it’s time to consider changing the way they do business. The current “what the market will bear” approach to pricing warranty products may strike people as capricious, given that it can boil down to how high a price a sales representative thinks he or she can negotiate with a particular customer.

“If U.S. Bank is looking at loans for Chevy Malibus, and some people are paying $1,100 for a service contract and some are paying $3,200, the bank is going to say ‘What’s going on, guys?” according to Dupaquier.

Advantages To Fixed Pricing

“The solutions are not that challenging,” Dorfman added. Both Dupaquier and he feel the smartest way to avoid entanglements with the CFPB, and potentially Congress down the line, is to use fixed, suggested retail prices on ancillary products such as service contacts. The price would be set based on vehicle age, mileage, the deductible and what is covered – with sales negotiations not playing a factor.

“Find the product that meets the customer’s needs based on their driving habits,” Dorfman summarized.

A set, non-negotiable price on such F&I products would bolster the credibility both of the product vendor and of the dealership, Dupaquier argued. It would “eliminate the possibility of discriminatory practices.” Dealers, in fact, might find their total F&I sales increase under fixed prices, with sales of policies increasing thanks to simplicity and improved credibility and more than compensating for reduced margins.

Dealership Can Get Behind Idea

Fixed pricing of F&I products for all customers would offer still other benefits to the dealership, said Stephen James, corporate controller for Park Place, a Dallas-based dealership group selling Mercedes-Benz, Porsche and other luxury brands.

“Standardized pricing provides for a much better customer experience,” James said. “You don’t have the haggling. You don’t have the customers worrying if they have been taken advantage of.”

Park Place standardized pricing on F&I ancillary products sold at its dealerships several years ago, in order to save customers time and “create an experience that makes clients keep coming back,” he reported.

Customers Will Find Out, Anyway

Dorfman believes the U.S. Bank move will further debate at a propitious time, given that buyers now can access a great deal of information about how vehicles are priced but don’t enjoy similar transparency with F&I transactions. “Why have it be questionable?”

Both Dorfman and Dupaquier believe financial services companies will continue to make dealerships respond to CFPB action, real or perceived. Even so, when it comes to underlying pricing of F&I products, “take U.S. Bank out of the conversation,” Dupaquier said. “Take CFPB out. And, put Facebook in.”

In other words, social media have the ability to immediately let disparity of pricing in financial contracts known worldwide, and the potential backlash from customers in response would be more painful than anything a federal bureaucracy could inflict.