U.S. Bank acts before CFPB can, but dealerships may be more amenable than with government intervention on APR.
BY CLINT WILLIAMS
A second front may be opening up in the battle against the way dealerships have been pricing F&I products for customers β 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 countryβs 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 β while all the attention until now has focused on the Consumer Financial Protection Bureauβs 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 βcertain neutral practices that have an adverse discriminatory impact on a prohibited basis (i.e., disparate impact).β And, the bank worries about the implications for more products than just auto loans.
βIf this monitoring program finds unexplained differences in pricing or excessive add-on product financing on a prohibited basis, then we will notify you,β the U.S. Bank notice read, according to F&I and Showroom. βWe 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.β
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 wonβt 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.
βU.S. Bank is taking a very proactive approach,β said Tony Dupaquier, who runs the national training academy for Service Group, an Austin, Texas-based supplier of F&I products to dealerships. Thatβs a prudent policy, he said, given the vagueness inherent in the CFPBβs use of guidance memos.
βThere are no direct recommendations from CFPB. They let everybody figure it out for themselves β and everybody gets in trouble.β
While some observers might characterize U.S. Bankβs tactics as an overreaction (after all, itβs 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 Itβs Time To Change
βWhile the argument over CFPBβs authority is going on, itβs well worth it that we, as an industry, discuss how weβre going to address it,β 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 itβs time to consider changing the way they do business. The current βwhat the market will bearβ 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.
βIf 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 βWhatβs going on, guys?β according to Dupaquier.
Advantages To Fixed Pricing
βThe solutions are not that challenging,β 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 β with sales negotiations not playing a factor.
βFind the product that meets the customerβs needs based on their driving habits,β 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 βeliminate the possibility of discriminatory practices.β 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.
βStandardized pricing provides for a much better customer experience,β James said. βYou donβt have the haggling. You donβt have the customers worrying if they have been taken advantage of.β
Park Place standardized pricing on F&I ancillary products sold at its dealerships several years ago, in order to save customers time and βcreate an experience that makes clients keep coming back,β 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 donβt enjoy similar transparency with F&I transactions. βWhy have it be questionable?β
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, βtake U.S. Bank out of the conversation,β Dupaquier said. βTake CFPB out. And, put Facebook in.β
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.