Having heard vendor reps and even some agents, trainers and F&I managers make such claims, F&I and Showroom’s Mad Marv Eleazer opened the compliance panel he moderated at Industry Summit with a question befitting its title, “Compliance: Separating Fact from Myth.”
“Do you think there is such a thing as a legally compliant menu?” he asked, directing his query at Hudson Cook’s Tom Hudson, who was joined on the Sept. 10 panel by Mosaic Compliance Services’ James Ganther, IAS’s Matt Nowicki, the Association of Finance and Insurance Professionals (AFIP)’s David Robertson and Safe-Guard Products International’s Damon Wiener.
Eleazer’s question was especially fitting given what Rick Hackett, a former official with the Consumer Financial Protection Bureau (CFPB), said regarding the bureau’s interest in F&I product sales during his keynote address a day earlier.
“If I found out that Walmart set the price [of their products at different levels], and they were all the same product, and they were just hoping I would buy one for $20.95 because I was a particularly gullible consumer, I’d be grumpy,” said Hackett, now a partner at Hudson’s firm. “That’s the bureau’s perspective of variable pricing of ancillary products.”
Compliant or Not
As for Hudson’s response to Eleazer’s question, the attorney said, “Before you can start thinking about [whether] the menu is compliant or not, you have to say, ‘Compliant with what?’” He acknowledged that there are very few laws that address menu sales or “what the content even has to look like.” However, making up for the lack of guidance regarding menu usage, he noted, are unfair and deceptive acts and practices statues as well federal laws like the Truth in Lending Act (TILA).
“Right away, I think of the Truth in Lending Act,” Hudson continued. “The Truth in Lending Act and Regulation Z permit you to exclude certain fees and charges from the finance charge in a transaction, but only if the purchase of the various products and services for which you’re changing … is voluntary.
“And in connection with a menu transaction, that’s one of the things you have to set up — make sure that the menu presentation makes it very clear to the consumer that the purchase of a particular aftermarket good or service is actually voluntary.”
Mosaic’s Ganther didn’t disagree. He did note that the menu, if used correctly, can serve as the perfect defense to a deceptive practices claim. “If you’re in that witness seat, you can truthfully say, ‘No, I don’t remember [that customer] … but we always follow the same process and here is our process,’” he said.
Wiener, who serves as general counsel for Safe-Guard, added: “If you have a menu and your practice is to use that same presentation with each and every customer that comes in, you’re protecting yourself from that customer who totals their vehicle two, three weeks after and says, ‘Oh, you never presented GAP to me.’
“If you’ve got the menu presentation for them, and they’ve signed off on the selected products, then you have some evidence that you did in fact present the option to them,” he continued.
Eleazer wasn’t done busting compliance myths. He asked the panel if F&I managers are legally required to have the base payment on the menu if it’s disclosed before customers reach F&I. He also asked about product pricing on the menu, saying that F&I managers are already mandated to disclose costs when reviewing the retail installment sales contract with the customer. Panelists acknowledged that the TILA doesn’t require such disclosures on the menu but said that’s something they’d recommend.
Nowicki, IAS’ vice president of retail software, noted that the 1,000 dealers using the firm’s SmartMenu include the base payment on the sales tool. “And yet, all 1,000 of those dealers still have their doors open; they all sell F&I products,” he said. “While there might not be a law saying you have to disclose it, it’s part of the normal process that many of you follow. Why veer from that to potentially gain a couple extra sales?”
Wiener noted that the added transparency even has the potential to win customers over. “What we’ve seen is, if you add a little transparency and give a little reconfirmation to the customers, it goes a long way,” he said.
The panel noted that only California and Minnesota have laws related to disclosing product pricing. However, even those mandates don’t specifically say product pricing needs to be on the menu. Instead, they require that an F&I manager make those disclosures on an accept/decline waiver.
“What most of our dealers do on the presentation menu is instead of disclosing product prices, they focus on monthly payments,” Ganther said. “Think about this: Product pricing can actually be a sales tool. And we see this over and over again: On that final menu where products are declined, when pricing is then disclosed — whether it’s the total price, monthly price, or some combination thereof — it can be a powerful sales tool.”
Panelists also tackled possible regulatory issues associated with the hybrid sales process, in which sales and F&I roles are performed by one person. They also addressed portable tablet menus and how they’ve allowed dealers to consider moving parts of the F&I process onto the show floor, a notion Hudson wasn’t too thrilled about.
“You’re going to be discussing confidential customer information, and if you’re going to be discussing it out on the sales floor, out on the lot, or wherever you’re going to be, you’d better be certain you have absolute privacy around you,” he said.
Nowicki also argued against the hybrid process, despite his company having a tablet menu in the market for two years. He said dealers put their stores at risk by replacing an F&I manager’s specialized knowledge with a salesperson serving in a dual role.
“We certainly believe in that higher-tech menu,” he said. “However, we do not believe it should be implemented by a salesperson-turned-hybrid closer. We do believe and always have believed that the menu process is driven by an F&I manager.”
Nowicki cited Sonic’s pilot program, the One Sonic-One Experience initiative, as an example of the difficulties of a one-touch process. In fact, during its quarterly earnings call in October, Sonic’s Executive Vice President Jeff Dyke admitted as much, saying that having one person guide each customer through the entire car-buying process had left the F&I department “overwhelmed.” He added that F&I performance did begin to rebound once the group increased training and added document specialists.
“I’m not saying it can’t work,” Nowicki added. “Perhaps it will be proven to work.”
The panel turned back to the CFPB, saying the bureau’s actions since it put finance sources on notice in March 2013 regarding their dealer compensation policies has definitely caught the industry’s attention.
“To me, it is objectively true that dealers are more concerned about compliance vis-à-vis F&I right now than I’ve ever seen,” Ganther said. “When I say it’s objective, we have four times as much sales volume and process right now than a year ago. Guess when that ticked up? [Since] January/February, our phone’s been ringing off the hook. So dealers are very concerned about that, and they need to be.”
Hudson agreed. “The general observation that things are busier on the legal side of F&I is, I think, very accurate,” he said. “And I think one source of it is the new CFPB now has 1,400 employees — 700 of them are lawyers. And the [Federal Trade Commission] has another few hundred lawyers. … That’s not enough lawyers to really swamp all the car dealers in the country by a long stretch.
“But every dealer on the planet sells paper to a company that buys retail installment contracts … What the CFPB has done, and what the FTC is doing, to some extent, is that if you’re the sheriff and you’ve got to catch a bunch of folks, you go out and find yourself a posse,” he added. “And the CFPB has made those finance companies and banks that buy paper from dealers their posse.”
Hudson’s comments echoed those of Hackett, who during his address predicted the CFPB would make another splash in the auto finance arena the following week. And that’s exactly what happened; the bureau unveiling on Sept. 17 a proposed rule that would give it supervisory powers over an estimated 38 auto finance companies.
“Will the bureau try to make the finance companies a cop for dealers’ pricing on ancillary products?” Hackett asked during his speech. “Going back to meteorology, there’s a low-pressure system off the coast of Africa, which we are all watching with some interest and nobody really knows whether it will become a hurricane, or if it becomes one, where the heck it’s going to go.”