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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.

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Dealership Training Economy

Make More Money on Returning Lessees

Contributing Author: Stephen RoennauRe-stating the obvious

  • Consumers held on to their cars much longer than normal during the recession or simply did without.
  • Post-recession consumers slowly came back into the car market. However, they were much more wary. Leases and used cars did better on average than new-vehicle sales.
  • Now, those lease terms are coming to a close, and dealerships can expect an influx of returning lessees, whom they can turn into new-vehicle owners.

What this means for 2014

According to “Automotive News”, General Motors saw those lessees start returning in November and they have only continued to grow.

Returning lessees pose a huge opportunity for dealership profit in 2014. Why? Because you’ve already done the legwork.

You’ve already built an ongoing relationship, bringing these consumers back to the dealership on a regular basis. Lease customers are on the hook, now you just have to reel them in with superior service and products.

What do we mean by service?

First there’s the follow-up. Evaluate your contact strategy for this audience. When do you begin contacting them? What is the contact frequency? What are your messages for this audience?

Remember, you don’t want to spam them, but you do want to stay top-of-mind. This is most easily done with your content rather than frequency. For example, many people, especially first-time lease customers, do not fully understand the process for lease-end. Educating them on the available options and inventory can go a long way toward influencing their purchase decisions.

You can also use your email communication to invite the customer in for a free trade appraisal to see how well the vehicle is holding its value. Simply getting them back to the dealership dramatically increases the chance of retaining lease customers. Remember, the customer who leased three years ago may be able to take advantage of better options. Many captives have stronger lease offers. Residual values in general have increased and the market has stabilized. Also, some lease programs waive the acquisition fee or security deposit on a re-lease or have other incentives for loyal lease customers. All these things add up to a greater opportunity for you to retain that customer.

In addition, it’s important to evaluate their experience in the showroom. You already have a database filled with information about their needs.

  • You know the current make and model of their car.
  • You know how many miles they drive.
  • You know their service history.

With these data points in mind, you can do much more than show them the new version of their car. You can offer suggestions on other makes, products, or financing options that might fit their needs better. When they come in, how prepared is your sales staff to meet their needs and exceed their expectations?

What about those products?

As with every customer in your dealership, returning lessees want the most for their money. After all, that’s the whole reason they chose to lease in the first place. Now is the perfect time to re-evaluate your F&I products and your provider. So, talk to your service advisers. They can tell you how quickly claims are processed, whether your admin is professional and courteous, and how many claims are approved. Those F&I products not only reflect back on you. Outside of the upsell opportunity, they can also help or harm your service drive, depending on how much red tape your service advisors deal with on a daily basis.

EFG Companies knows the importance of customer service combined with superior products. Everything from training to product administration has a single goal in mind – to be your partner for go-to-market success. Our agile product innovation and customization is backed by unmatched partner engagement and industry leading claims administration.

Make EFG your key to driving business. Contact us today.

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Dealership Training EFG Companies F&I

CFPB Crackdown – What You Need to be Compliant

Contributing Author: John StephensIn December 2013, the Consumer Protection Financial Bureau’s first blow to the automotive financing industry hit – and it hit hard. After an in-depth investigation, the CFPB ordered Ally Financial to pay $80 million in consumer restitution and another $18 million in civil penalties for having practices that made discrimination possible in their partner dealerships.

According to some consumer advocates, those dealership partners could now be sued by the same consumer’s receiving a refund check from Ally Financial. Why? Consider this situation.

Sally checks the mail one day and receives a letter stating that the lender backing her auto loan was forced to reimburse her and others who were discriminated against when purchasing their vehicle. She now has proof that the dealership where she purchased her vehicle employed discriminatory practices against her. With hard proof in the form of a check from Ally Financial, she contacts a lawyer and puts together a class action with all the other consumers the dealership allegedly discriminated against.

Now, another blow is about to hit. A consumer advocacy group in California is trying to place a proposal on the state’s November 2014 ballot that would prohibit dealerships from marking up interest rates on their auto loans. If this bill passes, it could provide the tipping point for lenders to change their policies and disallow dealerships from increasing their interest rates.

With the industry avidly watching to see how this will play out, now is the time to ensure the highest standard of compliance practices in your dealership. So ask yourself:

Do you have a compliance officer at your dealership? A compliance officer takes ownership of dealership compliance. They are responsible for the compliance strategy or business plan, determining holes, and the best and most efficient way to plug those holes.

How often do you provide compliance training? Automotive retail has always been a high turnover industry. Compliance training needs to be at the forefront as you add new employees, promote, and add new rooftops, etc. If your people don’t know the ever-fluctuating rules, how can they ensure they are abiding by them?

Do you perform regular compliance audits? By performing regular audits, you can be on top off inconsistencies within your dealership and address them before they get out of hand.

With this highly regulated industry, compliance is nothing new. However, the vague guidelines from the CFPB leave a lot to be desired in forming hard- and-fast rules. The best thing to do is consult with your legal counsel to ensure that your compliance strategy incorporates practices relative to the CFPB and general discriminatory laws. Some examples of these practices include:

  • Establish a published internal and external audit process that includes specific guidelines on the consequences of compliance violation.
  • Publish a schedule of training for both new and veteran employees to ensure all personnel are aware of the established guidelines.
  • Provide evidence of proper consumer disclosure.
  • Establish a “code of ethics” reviewing the policies and procedures signed off by all employees and new hires.

In addition, it is equally important to conduct thorough due diligence that all service providers, not just lenders, understand and are capable of complying with all state and federal laws by:

  • requesting and reviewing the service provider’s policies, procedures, internal controls, and training materials to ensure that the service provider conducts appropriate training and oversight of employees or agents who have consumer contact or compliance responsibilities;
  • ensuring the contract with the service provider includes clear expectations about compliance, as well as appropriate and enforceable consequences for violating any compliance-related responsibilities;
  • establishing internal controls and on-going monitoring to determine whether the service provider is in compliance; and,
  • taking prompt action to address any problems identified through the monitoring process.

With over 36 years in innovating and implementing proven go-to-market strategies in the dealership space, EFG Companies has made compliance a core facet of their business, influencing everything from product development to claims and client support.

Find out how compliance training from EFG can fortify your business to thrive while remaining compliant with current and future regulations.