In July 2015, BB&T Dealer Financial Services announced the launch of flat fees as the Consumer Financial Protection Bureau (CFPB) announced the expansion of oversight to larger non-bank auto finance companies. BB&T became the third auto finance lender to change their dealer participation practices, after Chrysler Capital and Santander USA. A domino effect quickly took place, with American Honda Finance Corporation, Fifth Third Bank, and Toyota Motor Credit joined the growing number of lending institutions either reducing their cap on dealer participation, or implementing flat fees.
In February, BB&T became the first auto finance company to reverse the trend, stating in an interview with Subprime Auto Finance News that the bank would be abandoning its flat-fee dealer compensation program and introduce a more traditional auto pricing program mid-March.
While BB&T plans to eliminate flat fees, we can still expect them to be more circumspect on the dealer participation cap than in previous years. In fact, Brian Davis, BB&T’s director of corporate communications stated, “BB&T remains firmly committed to the auto finance industry and to the fair and equal treatment of all consumers.”
The fact of the matter is that it is highly unlikely that the auto finance industry as a whole will raise their dealer participation caps back to pre-CFPB levels. After all, the concept of treating customers fairly isn’t go away.
With this in mind, dealers still need to stay true to the guidelines issued by the National Automobile Dealers Association (NADA) in their Fair Credit Compliance Policy & Program. As a refresh, this program outlined the following policy which dealers could use to maintain CFPB compliance.
Establish a method of pricing loans with a pre-set amount for the dealership’s finance reserve, such as with a fixed number of basis points over the wholesale buy rate. Then, allow for downward adjustments of that amount should a pre-determined condition occur, such as:
- the customer is not able to make the monthly payment based on the preset amount;
- the customer has a better offer somewhere else;
- the dealer has a promotional offer extended to all customers;
- the transaction is eligible to all customers for a lower interest rate from the manufacturer or other finance source;
- the customer is eligible for a dealer incentive program; or,
- the adjustment can be supported by documented inventory reduction considerations.
While this policy dealerships more leeway to negotiate, it necessitates extensive dealership practices to ensure discrimination, as defined by the CFPB, is not allowed. What is keeping many dealers awake at night is that all transactions that deviate from the published policy must be recorded and documented – effectively “piling on” in terms of the detailed work content already expected of their F&I department.
So how do you ensure compliance?
First, it’s vital to have written compliance procedures. NADA provides an excellent template and information on how your legal department can craft a comprehensive procedures document for your dealership. In addition, standardized forms need to be created, documenting the dealership fee, conditions which allow for reduction of the fee, and the final dealership fee. Proper documentation is not only vital in explaining pricing disparities that might lead to potential violations, it also helps streamline the process, ensuring that these compliance practices do not lengthen the customer’s time in the F&I office.
It is also important to ask yourself:
- Do my employees undergo formal compliance training at least once a year?
- Do I monitor and document all training, forms and compliance efforts?
- Do I have a compliance officer with the authority to implement compliance procedures and conduct formal audits?
- How often are my deal jackets audited?
Keep these suggested guidelines in when reviewing your compliance initiatives. Implement a formal auditing process and accountability system for your employees. Consider the practices you already have in place and how they can better serve your compliance efforts with CFPB’s guidelines.
Put more than 40 years of experience helping dealerships create operations that are both profitable and compliant in your corner. Contact EFG today.