Tag: CFPB

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Compliance

NADA Fair Credit Compliance – 8 Months Later

Steve Roennau Vice President Compliance EFG Companies
Contributing Author:
Steve Roennau
Vice President
Compliance
EFG Companies

It’s been eight months since NADA released their Fair Credit Compliance Guidelines to help the retail auto industry navigate today’s increased focus on regulatory compliance. As the Consumer Financial Protection Bureau (CFPB) continues to aggressively seek out discriminatory practices, more dealers and lenders are implementing flat fee programs to help alleviate these concerns, including disparate impact (practices that seem neutral but result in negative impact to customers in a protected class).

While NADA has provided this guidance to dealers and lenders as they scramble to navigate a more stringent compliance operating environment, it also means that the opportunity to make finance reserve is slimming or coming to an end. For dealers, this means they now need to focus more on selling F&I products to enhance bottom line productivity. For lenders applying a flat fee, this means re-evaluating how to remain competitive against lenders who still operate under a traditional fee structure.

How are you positioning your institution to capitalize on evolving dealer demands and remain competitive?

  • Are you paying a competitive flat rate?
  • Are you either allowing room to sell consumer protection products or providing competitive products built into your financing options?
  • Are your field representatives actively supporting the dealerships with which you work?
  • Are your field representatives familiar with the dealers’ operations and the markets in which they conduct business?

Today’s indirect lenders have to compete on so much more than they are used to. Now, instead of just competing on APR, they contend with a flat fee markup and leaving room for the sale of F&I products. With all these considerations in play, it can be extremely difficult to determine how to structure your loan.

Consumers want low APR and the dealership wants to make money – that will remain constant. And, until everyone adopts a flat fee, dealers have a variety of options to choose from to achieve their goals. If you are a lender operating under a flat-fee markup, one of the best ways to differentiate yourself is to provide complimentary consumer protection products on your loans. With this option, dealerships still make money on the flat, as well as have the ability to maximize their profit potential by selling upgrades to the products on your loan. In addition, those same products protect your loan from unforeseen circumstances that could affect the consumer’s ability to make their monthly loan payments.

It’s also important to remember the value of good customer service. Making your field representatives available during dealership hours, providing swift loan approvals, and providing sufficient underwriting guidelines will go a long way to securing your business with the dealership.

Cultivating a strong working relationship with F&I managers has always separated good lenders from their competition. A lending institution may have the best rate or fee structure available, but if their representatives aren’t available and attentive, that lender will fail to see sustained loan volume from their dealership partners.

Finally, understanding demographics for the surrounding areas can help your field team better position your loan for any particular dealership. Demographics have changed significantly since 2008, and statistics like the type of employers in your area, home value trends and income levels can help paint a more comprehensive picture of their current and potential customers. With this information in hand, you have a better ability to provide lending services that support the dealership goals of selling more vehicles, and in turn increase loan volume for your institution.

With more than three decades of developing and delivering consumer protection solutions and go-to-market strategies, EFG Companies gives clients the edge in the market place. Put our agile product innovation and unmatched partner engagement in your court today.

Categories
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.