The Consumer Financial Protection Bureau (CFPB) has not wavered in its belief that policies that allow dealers to mark up the interest rate on retail installment sale transactions creates a fair lending risk, with Toyota and Honda’s captive finance companies being the latest finance sources to be targeted. The attention dealer reserve is getting has caused some finance sources to limit rate participation, while others have eliminated dealer markups altogether.
This bureau’s activities have left dealers with a lot of unanswered questions: Is the CFPB coming after dealers next? If so, how can a dealership protect itself? If finance sources are pressured into eliminating rate participation, how will dealers make up for the lost revenue? Let’s examine these questions individually.
Question 1: Is the CFPB coming after dealers next?
In December, the CFPB fined DriveTime Automotive Group $8 million for making harassing debt-collection calls to its customers and for providing inaccurate information to the credit bureaus. Other than that, the bureau’s primary focus has been on dealer participation policies, but there is chatter the bureau could turn its attention to F&I product sales.
While it may seem like the bureau’s next target is dealers, remember that most dealers fall outside the bureau’s jurisdiction. See, thanks to the hard-fought exemption the National Automobile Dealers Association lobbied for, franchised and independent dealers with car-repair capabilities and who don’t hold their own finance contracts are not subject to the bureau’s enforcement, supervision and rulemaking. The latter condition is why the CFPB was able to target DriveTime.
Besides, with more than 17,500 franchised dealers in the United States and countless used-car dealers, it would be difficult for any regulator to target every dealer. However, it’s clear the bureau intends to affect dealer practices through its indirect regulation of auto finance sources. And don’t forget that the Dodd-Frank Act — the law that created the CFPB — gave the Federal Trade Commission expedited rulemaking authority with respect to dealers. It also called for information sharing between the two agencies.
Question 2: If lenders eliminate rate participation, how can I make up for the lost revenue?
Larger dealer groups have already figured out that the No. 1 reason for chargebacks is consumers refinancing their auto loan because the dealer charged them too much rate. In response, these dealer groups have instituted internal rate caps that limit the amount a finance manager can charge over the buy rate.
But I have to say, I am shocked by the amount of rate I see some dealers charge. One dealer even bragged to me that he was the leader in finance reserve at his last 20 Group meeting. Rate provides no value to the customer, and the more educated consumer will refinance. What does provide value are F&I products. That’s why service contracts, maintenance agreements, GAP, paintless dent repair and tire-and-wheel protection should be in every finance manager’s arsenal.
It is also important to employ a structured F&I selling process. There are still a lot of F&I offices that don’t use an electronic menu, costing their dealerships thousands of dollars monthly because they aren’t presenting 100% of their products to 100% of their customers 100% of the time.
Successful dealers employ a structured F&I sales process that includes a customer interview conducted at the salesperson’s desk, a menu that ensures that all products are presented 100% of the time, and an acceptance/declination sheet.
Question 3: How can I protect myself if the CFPB starts targeting dealers?
Again, the bureau does not have authority over dealers who have repair capabilities and who don’t hold their own finance contracts. The FTC and state regulators, however, do. And the best way to keep regulators at bay is to employ a consistent process. Here are some things to keep in mind:
- Customers know when the transaction is not transparent: If the dealership operates with nothing to hide, customers will relax and begin to trust the F&I manager’s advice. And people buy from people they like and trust. And remember, most regulator investigations are prompted by consumer complaints, so you’ll have nothing to worry about if you simply do right by your customers.
- Become a compliance leader: The large dealer groups realize that having the right compliance systems in place is the best way to keep regulators looking elsewhere. They also realize that people perform poorly without a solid process in place. And once both are in place, they concentrate on hiring the right people, then practice, drill and rehearse.
See, a formalized process ensures that everyone is getting the same presentation. It also removes personal interpretation and bias.
The use of a rate matrix is another best practice employed by large dealer groups. It should be developed by the finance manager and sales managers. It should ensure that all 550, 650 and 750 FICO-score customers are quoted and given the same rate, as it’s a big red flag with regulators if customers with the same credit scores are given different rates.
As for product caps, remember that a sale is made only when the value exceeds the cost. For example, tire-and-wheel protection has value to a customer when it is priced at $599 or $699. However, the value to the customer decreases when the cost is $1,999, because a vehicle owner can replace all four wheels and tires for less than that. So be sure to standardize pricing for each F&I product.
One guideline you can follow when developing your pricing strategy is charging between $599 and $699 for more inexpensive products like tire-and-wheel, between $795 and $895 for GAP, and $1,500 over the cost on a VSC.
The large dealer groups have found that every time they put an additional consumer-friendly policy in place, they increase their bottom lines. And after putting in place profit caps on F&I products and rate caps, they all experienced higher revenue in finance. Hey, these consumer-friendly policies might be the only line of defense against regulators.
John Lovin serves as vice president of Chrysler Capital Consulting. Email him at [email protected]