Impact of the Toyota Settlement

After undergoing a stringent investigation by the Consumer Financial Protection Bureau (CFPB) and the Department of Justice, Toyota Motor Credit Corp (TMCC) reached a “voluntary” resolution this past January to address alleged discriminatory practices in its loan pricing.

Of all of the lenders anticipating a CFPB investigation, TMCC was arguably the most prepared, having completed a very thorough overhaul of their compliance procedures based on CFPB industry recommendations. If anyone was going to come out the other end of a CFPB investigation unscathed, it might well have been them.

Nevertheless, it seems that the CFPB’s agenda to use lenders to regulate dealers was not appeased with anything less than sweeping caps on dealer reserve. TMCC joined the growing list of lenders to cap dealer markup at 125 basis points for loan terms up to 60 months, and 100 basis points for loan terms longer than 60 months. And, as with previous settlements with other lenders, TMCC retains the right to pay dealers a flat fee for setting up the loan in addition to the approved dealer markup.

The TMCC settlement is momentous to the industry because the CFPB appears to have settled on a way to regulate auto lending without implementing an industry-wide flat, but rather with capping dealer markup.

This settlement seems to inform the lenders across the industry that if they cap dealer markup at 125 basis points for 60 months and 100 basis points for longer loan terms, they will likely not have to jump through all the compliance monitoring hoops the CFPB required of Ally.

Meanwhile, lenders have at their discretion the ability to pay a flat in addition to the dealer markup. So if a lender wants to make up the difference between the reduced dealer markup and what dealers were traditionally paid before CFPB regulation, they can with the flat. However, it’s conceivable that any flat that may be paid could vary depending on institution-specific factors. Lenders could find it challenging to balance competitive flats with the various costs associated with their institution.

Yes, there is some opportunity for dealers to recoup lost rate profit. However, should a lender choose to pay a back-end flat, the amount the dealers is likely to get still does not come close to the rate markup to which they had become accustomed. Meaning, 2016 will be a year where F&I product penetration takes the foreground in increasing dealer profit.

However, increasing product penetration does not mean price gouging with F&I products. The CFPB and FTC appear interested in F&I product sales practices. Therefore, the products dealers choose to sell need to fill a real and calculable consumer need, uphold consistent pricing, and be priced to pay claims.

With this in mind, the dealers who take the time now to vet their product line in terms of profitability and compliance will be better positioned for long-term profitability. This starts with reviewing your contracts to get a better view of the product administrator’s practices and customer service standards.

For example, each contract should have a cancellation section, detailing how consumers may cancel the service. It’s important to review the cancellation section in-depth to make sure it meets all individual state and federal requirements, and it clearly communicates the cancellation process to be carried out in practice.

In addition, it is a good idea to review each contract’s terms and conditions to ensure the F&I product is designed to pay covered claims; then, compare the contract with the product collateral to ensure all local, state and federal advertising rules are followed, especially Truth in Advertising.

With this information in hand, you have a better ability to determine a consistent product markup for your dealership. However, the products themselves don’t provide a full picture of the contract holder’s customer experience. So, it’s also important to perform due diligence on the product administrators themselves.

How long have they been with their current underwriter? Do they hop from one underwriter to another, or do they establish long-term relationships? A general rule of thumb is the longer the underwriter relationship, the stronger the product reserves to pay claims.

Do they have enough reserves to pay claims? Look at how many claims are paid each year and their A.M. Best Rating, which signifies the company’s financial strength and ability to meet its ongoing insurance contractual obligations.

Do they abide by customer service best practices? Evaluate how quickly they answer calls and process claims. Check to see if they provide answers to commonly asked questions in easily accessible areas, like their website or an online portal to initiate claims.

Do they have any customer service awards and recognitions, or professional certifications? Certifications like the ASE Blue Seal of Excellence, NAF Consumer Credit Compliance Certification, and AFIP Certification legitimize a company’s customer service statements. They demonstrate a culture of transparency, service and compliance consistency.

With engagement from F&I product providers that embody dependability and integrity, dealers can rest assured that their F&I department is sufficiently equipped to increase dealership profitability and remain in compliance with all laws surrounding the F&I process.

We all know the phrase, “When one door closes another one opens.”

In the case of automotive finance, the ability to increase dealership profit on loan markup is closing. But, with the right F&I product administrator, dealers have a better ability to create sustained avenues of profit with F&I products from which consumers can derive real value, enabling dealerships to increase product penetration, product upsells, and repeat business.

With almost 40 years of innovating and administering consumer protection products, EFG Companies operates as a 100% administrator obligor on all product programs, removing any contingent liability from clients. EFG’s almost 30-year uninterrupted relationship with Assurant Solutions and their affiliated insurance companies, all “A” rated A.M. Best insurance companies, sets EFG apart as Assurant’s longest-standing Third Party Administration Partner.

Armed with a Consumer Credit Compliance Certification and a 100% AFIP certified field team, EFG’s compliance oversight is rated a top area of performance. The only provider awarded the ASE Blue Seal of Excellence, more than 90% of EFG’s adjusters are ASE certified, averaging of 15 years of experience.  In a recent client satisfaction survey, EFG’s net promoter score ranked higher than USAA Banking, Nordstrom and Apple iPhone, with 92% of dealers noting a high likelihood to recommend EFG.

Ensure future compliance and give your dealership the competitive advantage by contacting EFG today.