Category: F&I

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F&I Government Regulations

Are you frustrated with CFPB’s compliance guidelines?

Contributing Author: Steve KleesIf 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 CFPB’s auditing process. Almost a year has passed with limited clarification. Now, NADA has come out with guidelines on how dealerships can remain compliant. They also provide two options:

Option One

Establish a means of dealer compensation where the establishment of finance income does not vary on a customer-by-customer basis. To accomplish this, dealerships would charge each customer a fixed rate. This rate could be a flat fee, a fixed percentage of the amount, or a fixed number of basis points over the wholesale buy rate.

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.

Option Two

Start with Option One, by establishing a pre-set amount of compensation, 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 for a lower interest rate from the manufacturer or other finance source;
  • the customer is eligible for a dealer incentive program; or,
  • 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 may be keeping you awake at night is that all transactions that deviate from the published policy must be recorded and documented – and we all know how meticulous F&I departments are with details. The rest of NADAs guidelines include steps to ensure this option will keep dealerships compliant with Regulation B from the ECOA.

What this means for you

While these guidelines were meant for dealerships, they offer an excellent starting point for lending compliance practices, as well. As your dealerships determine which option is best for their business, it is equally important that you complete your due diligence. So ask yourself:

  • Do I have written compliance procedures?
  • Do I have standardized forms for indirect consumer loans?
  • Do my employees who interact with dealerships 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 the loan approval process?

Each one of these elements is vital in explaining pricing disparities that might lead to potential violations. Keep these suggested guidelines in mind when you consult your legal counsel regarding your compliance initiatives. In addition, consider including compliance in your discussions with your dealership partners. Formalize a process and accountability system for your employees should they discover a discrepancy with a dealership. Implement a formal auditing process for both your institution and your dealership partners.

You probably already have many of these measures in place, but haven’t sufficiently connected them with CFPB’s guidelines. Consulting with your legal counsel is the best place to start taking the frustration out of CFPB compliance.

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 dealerships and the end-consumer. Our unmatched client-engagement model goes well beyond simple product innovation to mitigating liability through superior claims processes, and continuous training and auditing practices.

Categories
Business Growth F&I Government Regulations

What’s Your Value Proposition for 2014?

Contributing Author: Steve KleesWhen you walk into a dealership, what value do you bring to the F&I office besides another loan for which their customers may qualify? In 2014, F&I managers across the country are concerned with three hot buttons:

  • Compliance
  • The Consumer Financial Protection Bureau (CFPB)
  • Maximizing profitability

As entities like the CFPB increase the pressure on compliance practices, F&I managers have a difficult job on their hands to balance compliance with profitability. The best way to separate your loan from the competition is to help them with this balance. How do you do this?

Understand your role in compliance culpability. As seen recently, the CFPB is targeting both financial institutions and dealerships for discriminatory practices. In December, they ordered Ally Financial to repay $80 million to consumers, whom the CFPB alleges were discriminated against. If you haven’t already, it’s time to evaluate your processes in approving auto loans to ensure your own compliance.

Provide clear standards for loan approvals. This not only helps with compliance, but helps F&I managers ensure that they submit well-qualified customers for your loans. You know your qualifications, but how well do F&I managers? Look at how often you deny auto loans. If that number is high, it could be because your standards are unclear to the F&I officer.

Provide more options to F&I managers. Traditionally, when you approve a loan, the F&I manager marks up your interest rate to help increase their profit margin. This very practice is what is under intense scrutiny by the CFPB. So, consider stepping outside tradition and provide options to maximize profit by structuring your loan with complimentary consumer protection products. By offering products such as vehicle return or a vehicle service contract, you set the stage for the F&I manager to upsell those products and get a greater share of the return. Offering complimentary products with upsell opportunities neatly nullifies compliance issues and increases profit for both you and your dealership partners.

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 increasing profit. 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 dealerships and the end-consumer. Our unmatched client-engagement model goes well beyond simple product innovation to mitigating liability through superior claims processes, and continuous training and follow-up.

Learn how EFG can take your value proposition to the next level in 2014.

Categories
Business Growth F&I

Preparing for 2014

Eric Fruithandler, Senior Sales Executive, Specialty Channel2013 is almost over and 2014 is upon us!

How did you fare in meeting your 2013 business goals?

How about preparing for 2014 initiatives?

Throughout the year we saw competition heat up as larger lenders got back into the subprime market, forcing underwriting standards to loosen across the industry. As larger banks and credit unions began offering more pre-crash terms and pricing on subprime auto loans, smaller institutions that focus on subprime lending have struggled to retain organic growth and keep their customer portfolio filled with well-qualified customers.

To regain market-share and outperform organic growth in 2014, subprime lenders need a two-pronged strategy to compete with increased competition for loans.

Insulation

The first step is to insulate your business from big lender competition. How do you do this? By focusing on your strengths! Those big lenders are still very wary of the subprime market; if there’s the slightest chance of significant volatility, they will jump ship. However, because you’ve weathered the storm through the Great Recession, you know how to manage more volatility in the market.

Part of the reason subprime auto lenders survived was because of their focus on customer service. By fortifying relationships with dealers and customers, and being flexible in tailoring their loans to meet consumer needs, those subprime lenders found a way to flourish in one of the toughest economic downturns in U.S. history. That strong focus on customer service will set you apart as competition increases. Throughout 2014, continue to ask:

  • How can we increase efficiency and courtesy in responding to applications?
  • How can we provide more value to both our dealership partners and the end consumer?
  • How can we increase transparency within our parameters to ensure our dealership partners know which customers qualify for our loans?

Attraction

The second step in the strategy is to make your auto loans more attractive for greater organic growth. This goes hand-in-glove with insulation as you cannot make your loans more attractive without good customer service. Concentrate on providing tangible value to dealerships by helping dealership personnel present more qualified customers by ensuring they understand your standards, and by responding quickly and efficiently to all applications.

Differentiate yourself beyond terms and pricing with consumer protection products, such as a vehicle return program, a vehicle service contract, or a limited powertrain protection plan. Products like these boost your bottom line, your dealership’s margins and protect the pocket-book of the loan applicant.

By focusing on customer service, flexibility and value, it is possible to tailor your portfolio to perform better in 2014. With over 36 years serving as an industry innovator of consumer and vehicle protection programs, EFG Companies is committed to the continuous development of innovative products and services paired with go-to-market strategies and execution support across a multitude of channels.

Find out how we can help increase your loan volume and performance while providing additional upsell opportunities to accelerate revenue growth. Contact EFG today!