Category: Compliance

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Compliance in 2015

Karen Klees, Certified Consumer Credit Compliance Professional, EFG Companies

 

Contributing Author: Karen Klees, Certified Consumer Credit Compliance Professional, EFG Companies

2015 is here and the CFPB is keeping up the pressure on compliance regulation. Everyone is wondering what the year will look like. Will more lenders implement flat rates? Will the CFPB find a way to extend their influence into the F&I space? Will Congress step in and impose restrictions on the CFPB? With so much up in the air, dealerships and lenders alike are waiting with baited breath to see what 2015 has in store.

Instead of waiting, it’s time to focus on and hone your operations. While many dealers have already begun decreasing their reliance on finance reserve and pushing for more product sales, you can bet that the CFPB is looking into how to branch into that area. In fact, in 2014, the CFPB reached a consent agreement with an F&I vendor and a lender, where each entity was required to issue reimbursements to contract holders for using ambiguous language in the product sales process, such as “This product will only add a few dollars to your monthly payment.” The CFPB stipulated that the exact price of the product is necessary in the product presentation, not generalities.

While the CFPB’s influence lies primarily with the lending community, they have been clear that lenders are also responsible for the actions of the vendors and partners with whom they choose to do business. This applies to who they use to service and collect their loans, as well as who originates them. So far, they have focused for the most part on rate administration as it relates to origination, but as we saw in 2014, they also took issue with the sales practices of ancillary products. To protect your dealership and keep operations running smoothly, take a deep look at your F&I product presentation with your legal team and address any issues that may arise.

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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.

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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.