CFPB | Lending Curve

Contributing Author: Karen Klees, Certified Consumer Credit Compliance Professional, EFG Companies

In a new world order of uber-competitive interest rates and shrinking profit margins, a significant number of lenders are supplementing revenues by promoting and marketing privately-labeled consumer protection products. While still reeling from the implementation of formal compliance processes relative to financing, discussion has grown louder regarding FTC and CFPB involvement in the oversight of the sale of F&I products.

There are many elements to consider as you review your current policies and procedures for your existing product offerings. On a positive note, having a suite of private-labeled products provides the ultimate control in pricing (and profit), and significantly more control in making sure your product offering passes the litmus test from a consumer perspective.

This being said, applying compliance standards and scrutiny to the partners you have chosen to be a third party administrator or insurer is growing in importance. A recommended starting point, as you evaluate or re-evaluate product offering, is to ask a simple question: Does the product’s benefits fulfill a real and mathematically calculable customer need (or have risk)?

Great News! The auto industry continues to break sales records! According to a report from Urban Science, the average number of sales per dealership in the U.S. is on track to hit an all-time record of 904 units, based on vehicle sales of 16.2 million. As far as subprime growth is concerned, according to CNW Research in July, the auto industry experienced a 25.5 percent year-over-year increase of subprime buyers. And, Edmunds determined that 77 percent of car buyers in the same month financed their vehicle purchase through the selling dealership.

With sales and indirect lending up, both lenders and dealers can be tempted to take a step back and relax. However, a new ground war is brewing around compliance and consumer perceptions.

The Consumer Financial Protection Bureau (CFPB) has continued to focus its efforts on the dealership finance process since fining Ally Financial, earlier this year. Recently, the CFPB fined First Investors Financial Services Group, Inc., which primarily operates in the subprime auto finance segment, $2.75 million for providing inaccurate information to credit reporting agencies. The CFPB and the Federal Trade Commission have also made it easier for consumers to post formal complaints regarding their treatment during the dealership finance process.

In addition, a recent survey of online shoppers by Kelley Blue Book found that:

only 14 percent of consumers planned to finance their next vehicle through a dealership;
54 percent believed the interest rate would be higher at the dealership; and,
31 percent didn’t trust the dealer to give them the best deal.

Analyzing the contradictory nature of consumer perceptions versus market statistics can leave you with a head ache, but it’s important to take their considerations seriously. Even though consumer perceptions are not directly affecting their decisions once they get to a dealership, consumers can easily file formal complaints and online reviews after the fact, which can have long-lasting and severe repercussions.

Certainly, the perception issue needs to be definitively addressed as the CFPB continues its campaign against dealer markup, but what does this mean for lenders?

The onus to change consumer perceptions does not lie solely on dealerships. Lenders can also re-evaluate their customer/dealer service to ensure they consistently provide dealers with an indirect lending model that meets consumer demands. Lenders need to ask themselves how they can act as an extension of the dealership:

Are my lending representatives accessible during dealership hours, not just bank hours?
How quick is my turn-around on loan decisioning, and how can I speed it up?
Do I provide understandable guidelines on the types of consumers that are eligible for my loans?
Have I implemented a quick and efficient funding process?
Is my institution making the F&I manager’s job easier?
Am I helping my dealers deliver more cars?

While these are pretty straightforward, you’d be surprised at how many lenders struggle with consistency in these areas. Your availability and active engagement with the dealer is critical. Ensuring that you provide a quick turn-around process and secure enough funds to meet dealer demands will keep your organization competitive and help dealers cultivate a positive brand image.

In addition, providing complimentary consumer protection products, like a vehicle service contract or vehicle return, on your auto loan will directly address consumer concerns about getting the best deal. Never before have consumers held on to cars as long as they are now. After dealing with significant vehicle repairs, consumers are now shopping for more than just APR. They are looking for the deal that provides the most for their money. With strategic F&I products paired with your loan, consumers will know that their investment is protected should an unforeseen mechanical breakdown or job loss occur.

For instance, with vehicle return, consumers coming out of the recession know they are protected if for example, they lose their source of income. This program allows consumers to return their vehicle to the selling dealership should unforeseen circumstances occur, like involuntary job loss.

Providing complimentary consumer protection products on your loans will also
make the F&I process smoother, allow for dealerships to make money on upgrades,
and protect your loan portfolio from the risk of delinquency or default.

With nearly 40 years of experience in innovating profitable solutions in the dealership space, EFG Companies knows how to differentiate your business and create sustained loan volume. Find out how, today!