Contributing Author: John Stephens, Senior Vice President, Dealer Services, EFG Companies
Last month was a big month for the CFPB. The Supreme Court of the United States held in the case of Texas Department of Housing and Community Affairs et al. v. Inclusive Communities Project, Inc., that “disparate-impact claims are cognizable under the Fair Housing Act.” The CFPB established their Larger Participant Rule, putting captive finance companies under their jurisdiction. And, BB&T announced the launch of a nondiscretionary dealer compensation program that prohibits dealer markup and offers a flat-fee dealer compensation program.
Right now, you can’t read the news without seeing an article about the CFPB and speculation on what the industry will look like in the coming months. Rumors abound that three captives currently under CFPB investigation, Honda, Nissan and Toyota, will cap dealer markup.
Just recently, Honda Finance Corporation reached a resolution with the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ), where it agreed to change its pricing and compensation system to “substantially reduce dealer discretion and minimize the risks of discrimination,” and to pay $24 million in restitution to affected minority borrowers. While the jury is still out on Nissan and Toyota, lenders have a unique opportunity to take advantage of all this activity.
But first, let’s discuss what each of these events means:
The Supreme Court ruling basically means that the regulation of disparate impact under the Equal Credit Opportunity Act (ECOA) in the area of automotive finance will remain unchanged. In particular, the Court’s reliance on the interpretation of the Age Discrimination in Employment Act in reaching its FHA conclusion strongly indicates that it will rely on that same language and the FHA ruling to ultimately allow disparate impact claims under the ECOA.
But, that’s not really news to dealerships or lenders. After all, lenders have been undergoing CFPB investigations, in some cases implementing policy changes and paying restitution for the past few years.
The establishment of the Larger Participants Rule was also something largely expected by the industry. The CFPB made no qualms in making its motive of extending its influence to dealers known. Their first step in accomplishing this goal was to regulate large banks. Now, they are, of course, expanding to nonbank entities, and we can expect them to continue work towards branching out across all lenders.
What’s interesting however, is the BB&T flat fee announcement and rumor of three captives (Honda, Toyota and Nissan) capping dealer markup. To date, lenders have done all they could to avoid capping dealer markup or flat fees with the implementation of more stringent policies and procedures. Even those lenders, like Ally Financial, that agreed to a resolution with the CFPB, refused to implement either of those options.
The question here is, if captives like Honda, Toyota and Nissan implement caps, and large banks like BB&T implement flat fees, will they establish a precedent for other lenders to follow? That’s most likely a logical conclusion.
As the CFPB makes good on their objective to curtail dealer reserves by regulating lenders, it’s time for dealers to ramp up their own efforts to reduce their reliance on dealer reserves in their overall profit mix. The most evident means of accomplishing this is to focus on increasing F&I product penetration. However, in the CFPB’s newly-released auto finance examination procedures, they are placing significant attention to products like vehicle service contracts (VSCs) and guaranteed asset protection (GAP).
So, before you rush off to implement new pay plans for F&I mangers, giving them more incentives to push products, step back and ensure that all your F&I practices are in compliance, starting with your product administrator.
- Does your administrator have adequate reserves to pay claims?
- Do they have a long-term relationship with their underwriter?
- What are their A.M. Best and BBB Ratings?
- How many claims are paid each year?
- What’s their average hold time?
Answering questions like these can provide a more complete picture of how their practices reflect back on your dealership. Beyond the product administrator, evaluate the current effectiveness of your F&I menu.
If your penetration numbers are low, consider whether your products fulfill the needs of your customers. Conduct a market analysis to determine their current needs and ensure that your F&I menu specifically reflects those needs. Then, provide the necessary training for your F&I managers and sales associates to demonstrate product benefits.
Lastly, remember that the 100%, 100%, 100% rule can be beneficial for more than just compliance. It also ensures that your F&I managers have the maximum opportunity to increase PRU by discussing all of your products on your F&I menu to every customer all the time.
With almost 40 years of experience in innovating and implementing go-to-market strategies in the dealership space, EFG Companies understands the balance between ensuring compliance and differentiating your business in today’s competitive market. That is why EFG structures its products and services to provide value to you and the end-consumer. Contact us today to find out how our unmatched client engagement model, product innovation, claims procedures and continuous training can take your dealership to the next level.