Tag: CFPB

Categories
Compliance

Flat fees for F&I products? It’s possible

Jim-HenryIt’s a question of “when, not if,” federal regulators will force auto lenders to switch to flat fees from dealer reserve, says John Pappanastos, CEO of EFG Companies, a major F&I administrator based in Dallas.

Flat fees for F&I products could follow, he says. If that happens, dealerships likely will reap lower revenues per vehicle and try to make up for it by selling F&I products to a greater share of customers, he says.

So far only one sizable U.S. bank has switched to a flat fee as its method of compensating dealerships for arranging car loans, BMO Harris Bank in Chicago, which began paying a flat in April.

Pappanastos spoke about regulation and F&I products recently with Automotive News Special Correspondent Jim Henry.

The Consumer Financial Protection Bureau says dealer discretion in setting interest rates can lead to discrimination in the form of higher prices for legally protected groups like minorities or women. Do you think the CFPB also has F&I product pricing on its agenda?

Ever since BMO Harris said it was switching to flat fees, everybody’s standing back and saying, “Now is there going to be a domino effect with other lenders following suit over time?” The next question becomes: What’s the next focus of scrutiny that could leave the door open for discrimination?

It’s a matter of when, not if. “When?” is probably the biggest question out there. How long for flat fees to come from a lender standpoint.

And that next focus of scrutiny will be F&I products?

When you’re financing a deal, certainly VSCs [vehicle service contracts] come to mind as a point for potential scrutiny and potential flat fee pricing.

The public dealership groups say they’re already getting about two-thirds of their F&I revenue per vehicle retailed from add-on products as opposed to dealer reserve. Is that typical?

We do monthly compliance audits with every dealership we work with. We recommend no more than 35 percent in finance reserve. The higher you get in finance reserve, the more likely a contract is to be refinanced. That customer goes home and they end up refinancing with their credit union, and then you have more chargebacks, to the detriment of the dealer.

From a dealer standpoint, it becomes a question of margin vs. volume. From a dealer profitability standpoint, it’s either “I’m going to get a giant amount per transaction” or it’s the penetration rate.

So if a giant amount per transaction is out, then it’s all about penetration rate, right?

Obviously, there’s always a trade-off between margin and volume. What’s going to happen if you go to flats is pricing is going to find the lowest common denominator.

There may be a lower margin on the front end, but VSCs drive customers back to the dealer, so you really want that. What we see happening is we see that if the market goes to a flat-rate model, we think that there will be pressure to drive product penetration on F&I product.

The next step will be dealers will say, “I need lower prices from our providers.” That’s the inevitable impact on F&I product providers from the CFPB.

Categories
Compliance

NADA Fair Credit Compliance – 8 Months Later

Contributing Author: John StephensIt’s been eight months since NADA released their Fair Credit Compliance Guidelines to help the retail auto industry navigate today’s increased focus on regulatory compliance. As the Consumer Financial Protection Bureau (CFPB) continues to aggressively seek out discriminatory practices, more dealers and lenders are implementing flat fee programs to weed out discrimination, including disparate impact (practices that seem neutral but result in negative impact to customers in a protected class).

While NADA has provided this guidance to dealers and lenders as they scramble to navigate a more stringent compliance operating environment, it also means that the opportunity to make finance reserve is slimming or coming to an end. However, there is an upside in maintaining dealership profitability, as flat fees leave room to make money on F&I products.

What are you doing to maximize this profit opportunity, given the changes affecting the retail automotive industry today?

  • Have you evaluated your F&I product portfolio to ensure you have the best product mix?
  • Have you sufficiently trained your F&I managers to increase product penetration?
  • Are your F&I managers AFIP certified, and do you have plans in place to get your people to senior or master?

To verify that you provide the right product mix, take a look at your CRM and pull the demographics and purchasing trends of your customer base. You can easily predict or better understand why some products sell more than others based on your customers’ behavior:

  • Do you push more new or used inventory?
  • Are your customers more interested in buying sedans, SUVs, trucks, or hybrids, etc.?
  • What is the primary use of your customer’s vehicles? Do they put a lot of miles on them?

Beyond CRM data, it’s also important to re-evaluate the market surrounding your dealership on the other side of the great recession. Demographics have changed significantly since 2008, and statistics like the type of employers in your area, housing prices and income levels can help paint a more comprehensive picture of your current and potential customers. While establishing which types of products your customers want or need is important, it’s equally important to evaluate your product administrator to determine their impact on your business.

  • Are their products insured by A.M. Best underwriters?
  • How many claims are paid each year?
  • What are their reserves?

Strong product providers, like EFG Companies structure F&I products that increase your profit and keep enough in reserve to handle whatever the market throws your way. Earmarks of providers like these include having the backing of an A.M. Best “A” rated company as well as having a culture of honoring claims.

In addition to establishing the right product mix, it’s also important to ensure your F&I managers have the right training and support to enhance bottom line productivity. Turn your team into Top Performers by ensuring they know how to:

  • Ask the right questions to determine customer needs;
  • Listen reflectively to customer concerns and readily position the product’s features and benefits to address those needs; and,
  • Increase the value proposition to the customer and enhance the customer relationship.

You could have the best products around, but without proper training, those products will not move. While classroom settings are perfect to refresh seasoned F&I managers and set up new managers for success, it’s vital that you hone those skills back at the dealership. Pair off your seasoned managers with new recruits to provide mentorship and practice. This will help both F&I managers keep their edge.

As dealerships focus more on selling F&I products, it is important to keep in mind the compliance practices that go with the sale of those products. The heightened focus on regulation does not stop at dealer markup. Everything is under scrutiny. The best way to ensure that your finance practices are compliant is to AFIP certify your finance team.

Founded in 1989, AFIP is the nonprofit, non-aligned sanctioning body in the United States for

  • in-store sales;
  • financial services personnel;
  • select lender; and,
  • aftermarket vendor personnel.

AFIP certification curriculum focuses solely on the federal and state laws that govern in-dealership financial services.

With the recent increase in regulation oversight, non-compliance can lead to massive financial exposure. By taking the initiative to AFIP certify your F&I managers and taking the steps to ensure your teams have the appropriate processed and controls in place, your dealership will more easily navigate the myriad of federal, state and local laws that impact your operation. In addition, by investing in more intensive AFIP courses for your senior team, they can more easily direct, provide advice and correction for your finance managers when it comes to compliance.

With the right products, comprehensive training, AFIP certification and a reliable product administrator, it is possible to significantly increase F&I penetration and compensate for the potential for lost revenue with a flat fee system while remaining compliant. With more than three decades of developing and delivering consumer protection solutions and go-to-market strategies, EFG Companies gives clients the edge in the market place. Put our agile product innovation, unmatched partner engagement, and industry-leading claims administration in your court today.

Categories
F&I Reulation

Are you frustrated with CFPB’s compliance guidelines?

Contributing Author: John PappanastosIf you attended NADA, or have simply been following industry news, you know that compliance is this year’s hot topic. In the first quarter of 2013, the Consumer Financial Protection Bureau (CFPB) threw a monkey wrench into standard auto financing practices, causing everyone to rethink the way they do business. They announced their intention to aggressively seek out lenders whose practices could be deemed discriminatory under Regulation B from the Equal Credit Opportunity Act (ECOA).

This regulation prohibits both intentional discrimination and practices that seem neutral but result in negative impact to customers in a protected class. According to the ECOA, customers could fall into a protected class based on their race, color, religion, national origin, sex, marital status, and age, among others.

While the CFPB stated that they would commence audits leading to legal action against lenders, their guidance bulletin left a lot to be desired. In essence, they instructed lenders to either:

  • eliminate dealer pricing discretion; or,
  • constrain dealer pricing discretion by monitoring dealership practices and using “controls” to force dealerships to adjust their practices.

Throughout the rest of 2013, lenders and dealers alike continued to ask for clarification on what those “controls” should be and for details related to the CFPB’s auditing process. Meanwhile, a consumer advocacy group in California began crafting a proposed ballot that would prohibit dealership interest rate markup practices altogether.  Almost a year has passed since CFPB made their initial statement with limited clarification and lots of industry frustration. Now, NADA has come out with guidelines on how dealerships can remain compliant. They also provide two options:

Option One

Establish a method of pricing loans where the establishment of finance income does not vary on a customer-by-customer basis. To accomplish this, dealerships would charge each customer a standard rate. This rate would either result from a flat fee or a fixed percentage of the amount financed paid to the dealership when lender presents their buy rate; or a fixed number of basis points over the wholesale buy rate established by the dealership.

While this option makes it very easy to remain compliant, it hampers the dealerships’ ability to offer competitive pricing, which also limits the customer’s ability to shop for the best value. For example, if a customer comes in and says they found better pricing elsewhere, the dealership may not be able to find a way to reduce the interest rate. What the CFPB does not take into account is that by trying to eliminate discrimination, they are actually taking away the competitive marketplace by necessitating that every dealership offer the same pricing to every customer, thereby eliminating the customer’s ability to shop for the best price.

Option Two

Start with Option One, by establishing 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.

Option two gives dealerships more leeway to negotiate, but 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 with Option Two?

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 or department who is not in any way involved in Sales or the F&I office?

Keep these suggested guidelines in mind when you consult your legal counsel regarding 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.

With over 36 years in innovating and implementing proven go-to-market strategies in the dealership space, EFG Companies understands the balance between ensuring complete compliance, and retaining and building profit margins. That balance lies in the value proposition. Which is why EFG structures its products and services to not only provide value to you, but also your customers. Our unmatched client-engagement model goes well beyond simple product innovation to mitigating liability through superior claims processes, and continuous training and auditing practices.