Contributed Author: Karen Klees, Certified Consumer Credit Compliance Professional, EFG Companies
June was a big month for the Consumer Financial Protection Bureau (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 recognizable 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 CFPB and the Department of Justice, 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 automotive 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 stating 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. However, that also offers lots of opportunity for lenders to compete for dealership business on other frontiers.
As the CFPB makes good on their threat to curtail dealer reserves by regulating lenders, dealers have ramped up their own efforts to reduce their reliance on dealer reserves in their overall profit mix. This largely means that they are investing significant time and resources to increase F&I product penetration on every vehicle sold.
That is good news for lenders, or at least those who align their lending practices with dealership goals. One very strategic way to accomplish this is through a private-labeled offering of consumer protection products to dealers. This provides lenders the ultimate control over F&I product pricing, and helps to ensure compliance with future CFPB initiatives, while giving dealers the opportunity to maximize their profit potential through the sale of a private-labeled product. As an added bonus, F&I products, like a vehicle service contract or vehicle return protection, have the potential to protect your loan from unforeseen circumstances that could affect the consumer’s ability to make their monthly loan payments.
Beyond integrating F&I products into your loan offering, it’s also important to cement dealer relationships by focusing on your efficiencies in providing superior service.
- Ensure your institution is available to respond to an application during dealership hours.
- Train your loan officers on being courteous and respectful while working with dealership personnel and on how to ask for the loan when approved.
- Make certain that dealerships understand the qualifications for your loans so less time is wasted on presenting an application that doesn’t qualify.
- Instill value by structuring your loan offerings and providing the correct options to dealers based on their customer base, i.e. – if their customers are typically middle-class commuters in a rural area, your F&I products will complement their lifestyle with the understanding that they’ll be putting a significant amount of miles on their cars.
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 yours business in today’s competitive market. That is why EFG structures its products and services to provide value to you, your dealership partners 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 institution to the next level.