If 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.
