Desking in a Rising Rate Environment

At the time of writing, The Fed raised rates  by 75 basis points. Industry analysts are predicting at least two more increases over the next three months, with expectations between 150 to 200 basis points total.

A dealer recently told me he was participating in one of the major bank’s F&I roundtable. The bank representative suggested that the buy rate for customers with a bureau score of 720 and higher would soon approach seven percent.

Many dealers employ a rate matrix to determine what rate to quote a customer at on the first pencil. Current rate matrices usually have an APR of 5.50% to 6.00% for a 720 and above customer and this rate includes 200 basis points of reserve.

We have been blessed with a stable rate environment for quite a while. That, my friend, is changing.

With a buy rate at 7.00%, the current rate matrix will not work. Dealers will have to update their rate matrices, likely two or three times in the next six months.

Here is a refresher on a compliant desking process.

WORKING THEORIES

We have a few working theories in our consulting practice. These working theories help us to focus on probable areas of concern as we begin reviewing deal files. One working theory is that if a dealership is still buying Sharpies to complete paper Four Squares, we will probably find a higher percentage of packed payments or potentially discriminatory pricing. That is if we can fully decipher the scrawl and figure out if the green Sharpie is the first pencil or the final agreement. At the least, we usually find that there is not a consistent approach to quoting the first pencil.

COMPLIANT DESKING PROCESS

There are two primary desking processes in the industry today. Some dealers will not quote payments during the sales process and focus on negotiating the trade difference before TO’ing the customer to F&I.

Other dealers employ a process where the focus is on the payment from very early in the sales process. Some dealers use a combination of the two.

Focusing on the sales process where payments are quoted, there are many compliance pitfalls that a dealer must guard against. Working the trade difference is not as susceptible to compliance issues…after all, if you don’t quote a payment, you can’t pack a payment.

The first potential compliance issue with quoting payments is an expectation from the Dark Side that the payment quote is accurate for what is disclosed and contemplated at that point in the negotiation. One of the members of the Dark Side, the Attorneys General, coined the phrase payment packing around 35 years ago and consider it a deceptive practice.

Payment packing can take many forms, such as including undisclosed F&I products in the payment quote, using an undisclosed short term to artificially increase the payment, using a rate that is higher than the known rate if an approval has already been obtained, extending the number of days to first payment, or shortening the number of payments per year. Of course, the old-school ubiquitous LEG is packing a payment.

Another potentially problematic issue with quoting payments can be perceived as discriminatory pricing. If I conducted an analysis of the first pencils during a period of time, and the results show that any of the protected classes under the Equal Credit Opportunity Act were quoted higher rates that the rest of the deals, an allegation of discriminatory pricing could be leveled.

Many dealers who quote payments during the sales process have implemented a policy on how first pencil payments are to be quoted. Essentially, it depends on whether the credit score is known or not.

If a credit bureau has not been pulled, the dealer requires that a standard rate be used to quote the first pencil. In an e-desking tool this rate can be set as a default rate.

If a credit bureau has been pulled, a published rate matrix determines what rate must be used on the first pencil.

If a sales manager deviates from the established policy, the reason must be noted. Allowable exceptions include using a factory sponsored rate, accommodating a customer request for a specific rate, or matching a credit union rate.

Additional policy requirements include the disclosure of term, no more than 45 days to first payment, always use 12 payments per year, do not include undisclosed F&I products, do not add LEG, and keep the payment spread to $5 or less.

Continued good health, good luck, and good selling..

ABOUT THE AUTHOR: Gil Van Over is the Executive Director of Automotive Compliance Education (ACE). He is also the Founder and President of gvo3 & Associates.