Steve Roennau
Vice President
Compliance
EFG Companies
Since July 2010, the Consumer Financial Protection Bureau (CFPB) has made significant waves in the auto finance space. In 2013, they issued their bulletin titled “Indirect Auto Lending and Compliance with the Equal Opportunity Act” stating that they would regulate lenders on unanticipated discriminatory practices. With very little guidance on how to be compliant, lenders and dealers scrambled to revamp their anti-discrimination practices to little avail.
Between 2013 and 2016, the CFPB filed 13 enforcement actions totaling upwards of $165.17 million against auto financiers, such as:
- Toyota Motor Credit Corporation
- Fifth Third Bank
- American Honda Finance Corporation
- Wells Fargo Bank, N.A.
- JPMorgan Chase Bank, N.A.
- DriveTime Automotive Group
- First Investors Financial Services Group
Beyond the restitution and civil penalties leveraged against lenders, the increased compliance oversight also had direct impact on dealer profit margins, consumer prices, and the national GDP.
According to a 2014 study of the auto finance regulatory environment by the Center for Automotive Research (CAR), regulations pertaining to employment, accounting and vehicle financing made up more than 63 percent of all estimated federal regulatory compliance costs. The administration of vehicle financing alone accounted for 71 percent of all vehicle finance compliance costs and 26 percent of total dealership compliance costs.
In 2012, a typical U.S. dealership with $38 million in revenue incurred $182,754 annually in federal regulatory compliance costs, which amounted to:
- 7 percent of the average dealership’s before-tax net profits
- $2,371 per dealership employee
- 106 vehicle sales
- $100 mean cost per vehicle
This totaled $3.2 billion in compliance costs across all U.S. light vehicle dealerships, representing a 3.7 percent increase in dealership expenditures and a 26 percent net profit decrease. Even before the CFPB ramped up their compliance oversight, dealers were exploring every possible avenue to make up their lost profit-margins due to compliance, including:
- cutting their labor force;
- raising vehicle prices where possible;
- increasing unit sales volume; and
- increasing their F&I product penetration rates.
Since then, compliance costs have only continued to increase, helping to further inflate new vehicle values, loan terms, and loss ratios. This increased dealer and economic cost is taking a toll on loan portfolios. As lenders look to protect themselves from rising delinquencies that have resulted from market inflation and aggressive lending standards, it’s important that they also look at how to stay relevant and competitive in the market by helping dealers recoup their lost profit.
Lenders offering complimentary consumer protection products, like vehicle service contracts and vehicle return protection, have a three-fold advantage over the competition by providing benefits to consumers, dealers and lenders.
| Benefits to Consumers: | Benefits to Dealers: | Benefits to Lenders: |
| Consumer protection products allow consumers to avoid unexpected expenses that may inhibit their ability to make their car payment. | Starting the F&I process with a loan paired with complimentary consumer protection products puts dealers in a positive position with their customers, enabling them to upsell consumers to enhanced benefits, thus improving profit potential. | Consumer protection products have the potential to differentiate a lender from the competition by providing benefits consumers want and profit potential dealers need. They also protect lender portfolios from the risk of default and delinquency by protecting consumers from unexpected expenses. Lastly, lenders have a greater ability to pad their portfolio with non-interest bearing income. |
As compliance costs and vehicle prices rise, lenders need more tools than APR and loan terms to manage look-to-book goals and loss ratios. Adding complimentary consumer protection products to their tool belt opens the door to increased non-interest-bearing income, better dealership relations, and enhanced compliance control.
With 40 years of innovating and implementing proven go-to-market strategies in the dealership space, EFG Companies understands the balance between ensuring complete compliance, 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. Contact us today to fortify your loan portfolio, increase your profitability, and expand your dealer book of business.