At the very least, it means more complexity and cost in the F&I process that dealerships or customers will have to shoulder. BY CLINT WILLIAMS
New federal regulations intended to protect car buyers may cost them money. Certainly, they will likely create new headaches for both dealerships and their customers.
The Consumer Financial Protection Bureau (CFPB) has decided to start supervising more than three dozen non-bank auto finance companies, extending its regulatory reach beyond dealerships’ commercial bank partners. More specifically, CFPB scrutiny will now fall on non-bank lenders that make or refinance 10,000 or more loans or leases each year. Nearly 7 million customers do business with such lenders, and the non-bank financial units of major automakers such as Ford, Chrysler, Honda and Nissan are among the 20 largest automotive lenders overall, according to Experian.
Under the new rule, the CFPB will oversee these so-called “larger participants” to ensure they are complying with federal consumer finance laws including the Equal Credit Opportunity Act, the Truth in Lending Act, the Consumer Leasing Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition against unfair, deceptive or abusive practices.
“Auto loans and leases are among the most significant and complex financial transactions in a typical consumer’s life,” CFPB Director Richard Cordray said in a prepared statement when the rule was published in June. “Today’s rule will help ensure that larger auto finance companies treat consumers fairly.”
CFPB examiners will be assessing potential risks to consumers and whether auto finance companies are complying with federal consumer financial laws. Among other things, examiners will be evaluating whether non-bank auto finance companies are:
- Fairly marketing and disclosing auto financing terms. The CFPB will examine auto finance companies that market directly to consumers to ensure they are not using deceptive tactics to market loans or leases.
- Providing accurate information to credit bureaus. The bureau will assess whether information that auto finance companies provide to credit bureaus is accurate.
- Treating consumers fairly when collecting debts. The CFPB will examine whether auto finance companies are using illegal debt collection tactics. Regulators also will review the repossession process, including the practices of third-party service providers that are employed to repossess autos.
- Lending fairly. The bureau will assess whether auto finance company practices comply with the Equal Credit Opportunity Act and other regulations.
CFPB supervision may involve requests for information or records, targeted reviews, and on-site and off-site examinations, according to a report issued by the PricewaterhouseCoopers accounting firm. CFPB examinations scrutinize not only compliance with regulatory requirements, but also a lender’s internal structures and processes and its capacity to stay compliant.
The largest lenders can expect to be reviewed every other year, PwC said.
“Lenders may incur significant costs in order to effectively prepare for and respond to examination requests. The cost of an examination is not limited to the cost incurred during the exam itself, due to the high level of documentation gathering and exam preparation required,” according to the PwC report.
Such compliance with additional regulations logically means additional costs to dealerships whose F&I departments partner with non-bank lenders.
“The primary impact that CFPB’s vehicle finance larger-participant rule will have on non-bank auto lenders is increased compliance costs of hundreds of thousands of dollars,” predicted Karen Klugh, spokeswoman for the Washington-based American Financial Services Association. “These costs will stem from hiring and training additional personnel, making systems changes, revising procedures and enhancing compliance management systems.”
Added Klugh: “These additional costs of doing business for lenders likely would trickle down into the cost of financing, which likely would be passed on to consumers.”
The regulations won’t just add costs; they also will take away flexibility to close a deal, said Ron Reahard, president of Reahard & Associates, an F&I training firm based near Chattanooga, Tenn.
“I think it’s going to impact the consumer more than the dealer,” he said.
Why? He believes the regulations will accelerate a shift to different forms of compensation for dealers. The dealer reserve – the dealer increase on a consumer auto loan – may be replaced with a flat fee based on the size of the loan, Reahard said.
A July settlement between the CFPB and American Honda Finance Corp. may hint at the future of dealer compensation from non-bank financial groups. American Honda Finance agreed to cap the dealer reserve. Dealerships using Honda Finance will be allowed to increase rates by no more than 1.25 percentage points on loans with terms of up to 60 months, and no more than 1 percentage point on loans longer than 60 months.
The agreement also allows American Honda Finance to pay a dealer a non-discretionary fee in addition to the dealer reserve. That could take the form of a flat fee (such as $100 per loan); or an additional, fixed portion of the interest rate that would be reserved for the dealer, beyond the discretionary 1.25 percent or 1 percent.
Dealers will sometimes take a loss on the vehicle sale, knowing they could make an overall profit through the auto financing. With recent developments, that option is now gone, Reahard believes.
However, large, publicly traded auto dealers should have few issues complying with the new rule, said Kevin Bradberry, president and CEO of TK Worldwide, an automotive training and recruiting company. Large companies have the staffing and infrastructure to adjust to changes in federal regulations.
Such dealers can make changes to their online menu selling system that guides the F&I staff on each lot “through the exact same steps every single time,” he said. “Compliance will be an bigger issue for smaller dealers.”
Non-bank auto finance companies “will need to make significant changes to their processes and systems” to comply with the new regulations, according to a white paper issued by Cognizant, a Teaneck, N.J.-based provider of information technology, consulting and business process outsourcing services.
Among the steps that the Cognizant report recommends lenders and dealers take are:
- Develop policy, controls and reporting for dealer interest rate mark-up.
- Develop and implement new compensation models that can be proven to be non-discriminatory.
- Train associates at the dealership on fair lending practices and provide regular training on fair lending principles, documents and processes.
- Develop e-learning modules to train associates, and track whether they are keeping up on their learning.
- Train dealers on effectively explaining GAP coverage, terms, costs and processes to consumers.