Business Growth

2023 – Managing the Tipping Point

Credit unions have an extra reason to celebrate over the holiday and new year season. According to the third quarter State of Automotive Finance Market Report from Experian, credit unions now account for the majority of the auto loan market share. Whether they keep these gains in 2023 is yet to be seen. While Federal Reserve prime rate increases do not directly translate to increases in auto loan rates, there are some notable ripple effects that auto lenders are watching. Fluctuations in new and used car prices, higher down payments, longer loan terms, increased defaults, and loan-to-value ratios will all factor into the mix next year. We look forward to collaborating with our credit union lending partners and keeping the scales on an even keel.

GAP for some

Keeping a close eye on the loan-to-value ratio on every deal will be key for lenders in 2023. We encourage our lending partners to offer GAP on those deals with lower down payments and a higher risk of default if the vehicle is deemed undriveable and insurance coverage does not cover the replacement value. For some customers, having GAP coverage in addition to a vehicle service contract can mean the difference between a major tip of the scale or a manageable event.

Reaching the limit

Higher monthly payments and longer payment terms are becoming more common place as the price of both new and used vehicles continue to rise. While some buyers might focus only on the short term, auto lenders who look across their total portfolio might see signs of caution. Even credit union members who are considered prime can run into difficulty in uncertain economic times. Debt protection products such as WALKAWAY® can provide some counterweights to keep the scale in balance and protect positive revenue in 2023.

Compliance EFG Companies Government Regulations

Targeting GAP

If you look at the flurry of GAP-related state-level legislative bills proposed so far in 2022, you could surmise that this consumer protection tool is under fire. According to American Financial Services Association Senior Vice President Danielle Arlowe, the organization has counted 30 pieces of legislation in 2022, compared to 14 bills between 2019 – 2021. These new legislative efforts join existing statutes on the books in 11 states which require the lender to refund a consumer who cancels financed GAP coverage.

At the federal level, officials have again raised the issue that bundled GAP coverage renders the auto loan to be under the purview of the Military Lending Act (MLA). The Consumer Financial Protection Bureau, Department of Defense, and Department of Justice recently argued in the class-action lawsuit Davidson vs. United Auto Credit that loans containing a nonexempt product such as GAP would not be exempt from MLA.

These developments put retail automotive lenders in a difficult position. For example, the California Assembly Bill AB 2311 requires that customers be notified that GAP insurance is an option and requires that lenders automatically refund any GAP balances if the loan is paid early. Other components of the bill stipulate a cap on the price of the GAP insurance as well as banning its sale under certain criteria related to the amount financed. Arlowe believes the industry is at a turning point with GAP insurance and the relationship between creditor, dealer, and administrator.

Banner Government Regulations

Make CFPB Exposure a Non-Issue

Contributing Author: John PappanastosWith the Consumer Financial Protection Bureau (CFPB) threatening to crackdown on what they deem as predatory auto loan practices, dealers and financial institutions alike are scrambling to make sure they are compliant with the fair lending requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The CFPB was created in July 2010 in an effort to consolidate most Federal consumer financial protection authority in one place.  To-date, the thrust of the CFPB’s oversight has been on rooting out deceptive advertising and sales practices, including misrepresentation of products or product costs, and enrolling customers in products or programs without their consent.   In general, the laws prohibiting these practices are not new; however, the CFPB has also stepped up efforts to eliminate discriminatory practices.  Take the following example:

Sally, a subprime borrower, walks into a dealership to purchase a car. Her F&I manager submits the paperwork to several lending institutions, who then decide to extend a rate on the loan. The interest rate offered by the lender to Sally reflects the higher risk in a loan to an individual of Sally’s credit worthiness.  The F&I manager presents Bank ABC’s rate to Sally, but what she doesn’t know is that, after getting the bank’s rate, her F&I manager increased it with the intention of the dealership participating in the lending profit.  No problem so far.

However, a discriminatory practice occurs if the F&I manager marks up Sally’s interest rate by a greater amount than the dealership typically marks up the bank’s “buy rate” for other customers, even if Sally has few other options to finance her vehicle purchase and is willing to accept the interest rate presented by the dealership.  The fact is that the bank’s buy rate already appropriately reflects the risk in a loan to Sally and the cost to the dealership associated with financing Sally’s purchase is no different than that associated with every other customer.   If the F&I manager increased the rate more for Sally than he would have for another customer because of her race, gender, ethnicity, or any other protected class, then his actions could be deemed discriminatory and both the dealership and Bank ABC could be held liable.

Some questions have arisen from lenders as to whether the sale of F&I products, such as extended vehicle service contracts, could increase their liability.  Not surprisingly, subprime lenders have asked the question most frequently as they were the proverbial “scapegoat” held responsible by many for the latest recession.  As sub-prime lenders expect to be targeted first and monitored most closely by the CFPB, it makes sense for them to double check every process and procedure to ensure compliance.

Lenders who partner with consumer protection product administrators that understand the depths of their business and the regulation that goes with it don’t have to worry.  Organizations like EFG Companies (EFG), that hold administrative licenses in every state for the sale of F&I products, have made compliance a core facet of their business, influencing everything from product development to claims and client support.

The sale of vehicle service contracts and GAP policies are some of the most highly regulated products by the states.  As long as the seller’s advertising and sales practices are sound, the responsibility for compliance actually lies with the contract administrator.

As noted previously, the majority of legal hot spots to-date concerning the sale of consumer protection products fall within marketing and advertising, where companies may inappropriately use deceptive language regarding actual product benefits, the cost of the product, or eligibility.  Advertising and sales practices are deemed sound on multiple bases.  The products available for discretionary purchase should be presented to all prospective buyers.  The features, coverages and eligibility requirements as well as the cancellation and refund policies associated with the products should be fully disclosed.  And the incremental cost associated with each product should be fully disclosed in an uncomplicated manner.

With engagement from F&I product providers that embody dependability and integrity, lenders can rest assured that their loan buyers and their dealership partners are presenting their products accurately and fairly.  EFG goes above and beyond to mitigate liability by developing customized go-to-market execution plans for each client.  This effort begins with a comprehensive review of the client’s existing processes and leads to joint agreement with the client with respect to a well-defined blueprint for compliant – and profitable – implementation.  EFG then creates customized training curriculum and conducts interactive training with the client’s field sales force and credit analysts, supported by ongoing monthly audits, to ensure that compliance pitfalls are avoided.

Sub-prime lenders have a great opportunity to bundle their loans with F&I products to increase profit per transaction.  However, lenders should keep these considerations top of mind when selecting their product administrative partners:  their operating history and customer service brand recognition in the marketplace, their compliance focus and capabilities, and their liability structure.  Whomever they choose as their partner must be strong in all three areas to provide the level of service and compliance expected from a trusted partner.