I love how the F&I manager is often referred to as the financial services manager. It makes sense, but let’s be serious: With what’s transpired since 2001, can we really say we’ve counseled consumers? Well, there are a new set of rules that aim to change that.
On Dec. 22, the Federal Trade Commission (FTC) and the Federal Reserve Board (FRB) issued finalized rules for what is called Risk-Based Pricing Notices (RBPN). These new rules implement Section 311 of the Fair and Accurate Credit Transaction (FACT) Act of 2003.
Now, come Jan. 1, 2011, creditors (yeah, that means you) will be required to alert consumers when derogatory credit data causes them to receive less than optimal terms. I know what you’re thinking: you don’t make risk-based decisions based on a customer’s credit.
Let’s say you decide to send a credit app to a specific finance source based on the customer’s credit score because you know it specializes in that customer’s spectrum. Well, according to the FTC, that means you’ve made a risk-based decision.
What about dealer markups? Well, if you’ve bumped up the wholesale rate a couple of points in exchange for services provided, doesn‘t that mean the customer received terms less favorable than he or she normally would? That’s why I won’t even begin to translate the 202-page rulebook governing when the rules apply.
Now, these rules have been six years in the making, which begs the question: Why now? Well, the culprit carries the same moniker as the rules: risk-based pricing, a practice in which creditors can set and adjust pricing and other terms of credit provided to a consumer based on his or her credit-worthiness.
Do you remember back in 2007 when “subprime” was named the word of the year by the American Dialect Society? Well, one of the reasons is because finance sources, armed with these pricing models, were lining up to serve the nonprime and subprime marketplace. In fact, it worked so well that it prevented the Adverse Action Notice requirement from upholding its intended purpose.
See, the goal of the Adverse Action Notice was not simply to inform consumers that they had been denied credit and other benefits based on information in their credit report. No, the underlining objective was to ensure that consumers received a free credit report at least once a year so they could ensure the accuracy of the report — a concept introduced by the FACT Act.
“What had been occurring was that people were not getting denied credit, but were getting much worse material terms and weren’t being informed of that fact,” said FTC attorney Manas Mohapatra. “So the new rules aim to fill that gap.”
With that said, I’m happy to report that there is a dealer exception thanks to the National Automobile Dealers Association. See, rather than making you responsible for determining when the rules apply, the exception allows you to satisfy the rule by providing all credit applicants with what is called a Credit Score Disclosure Notice. Among other things, the notice must include a written description or graphic representation of how the applicant ranks against other customers. Luckily, like the Adverse Action Notice requirement, the RBPN rulebook provides template notices dealers can adapt for their stores.
Now, make no mistake about it, these rules are aimed at the mortgage and credit card industries, business segments many believe were the culprits behind the credit industry’s meltdown. And while there’s validity to that statement, our industry should not ignore the role it played.
See, there wasn’t a day back in 2006 and early 2007 that I didn’t hear a F&I manager describe the difficulty in managing customer expectations. As long as the monthly payment fit their budget, these customers wanted that SUV with all the bells and whistles — even if it didn‘t make financial sense. And as many of you stated, if you didn’t get the deal done, some other dealer would — and consumers knew it.
The problem now is that even after what we’ve been through, consumers still don’t get it. That’s why I think these rules could be beneficial. While new regulations are never a good thing, I think these rules really address what‘s needed — an education for consumers about how their credit impacts their buying power.
If we can build a little more consumer confidence in our business by showing that we care — whether we’re required to or not — doing so can only be a good thing. Now, understand that many of my legal experts believe these rules will be delayed like the Red Flags Rule. But hey, why not get started on this early, and show your customers that you only have their best interest in mind.