Were you surprised by the news? I wasn’t. In fact, I’m surprised it took so long for U.S. Bank to tell its dealers it plans to monitor the pricing of add-on products in the consumer loans it finances. If the announcement in late May was motivated by the Consumer Financial Protection Bureau (CFPB), which seems be the case, it signals a shift in the bureau’s war against dealer-assisted financing practices.
This new front leaves behind the exhausted arguments of disparate impact theories of discrimination, which rely on controversial statistics, and turns instead toward practices the bureau deems to be deceptive and abusive. This should give dealers pause when it comes to their F&I product pricing and disclosure procedures. Will they hold up under the scrutiny of their lenders, over whose shoulders Big Brother is watching?
One of the reasons I’m not surprised by this news is U.S. Bank shelled out significant sums after it entered into a consent order in June 2013 with the CFPB regarding its now-discontinued Military Installment Loans and Educational Services (MILES) program, which offered F&I products to U.S. military service members in conjunction with Dealers’ Financial Services (DFS). The CFPB said the program misrepresented the cost of F&I products by claiming the vehicle service contract (VSC) added just “a few dollars” a day to the customer’s monthly payment and the program’s GAP offering added only “a few cents” a day. In reality, the service contract added an average of $43 a month, while the GAP product added 42 cents a day.
Additionally, U.S Bank and DFS failed to prominently disclose what the VSC didn’t cover. The CFPB concluded that U.S. Bank and DFS violated the Consumer Financial Protection Act by making deceptive statements regarding the cost of the program’s add-on products and the scope of the VSC’s coverage.
Notably absent from the CFPB’s consent order was any discussion of disparate impact on protected classes. But make no mistake, the data the bureau is compiling about the pricing of add-on products could certainly be used to fan the flames of the regulator’s allegations that minorities are adversely affected by auto finance practices. Undoubtedly, some bureaucrat statistician deep within the bowels of the CFPB may be looking for just such a correlation. However, it is a far easier argument to make that the bad actor in this scenario was engaged in a pattern of deception than one of discrimination.
That being said, protecting the dealership against charges of deceptive practices is far easier than protecting it against charges of discrimination. I liken it to going to the doctor and telling him, “Hey doc, it hurts when I do this!” He, of course, replies, “Then don’t do that!”
Business managers should embrace disclosure in their presentation, since credibility is the currency we spend in our offices. The hide-the-ball approach employed by some practitioners, whose products magically appear in the consumer’s documents or who engage in the practice of closing on a payment and figuring out the costs of the products after the fact, will lead regulators to the question of how a customer can make a knowledgeable purchase without knowing the costs of the options selected. Heck, they may even ask if a customer chose to purchase those products at all.
That’s why a menu has such a disarming effect on many customers. If a customer asks the price of an option, simply point to it on the menu and the response you’ll usually get is “Oh, OK” or “Yeah, that’s about what my last one cost.”
Consistent pricing also makes life easier. For one, you don’t have to remember what you charged the last customer because every customer is charged the same price. And if the consumer objects to the cost of a particular product or the inclusion of a product in the group of options, the objection is much easier to handle while the customer is in front of you. That’s because the objection provides you with the opportunity to reevaluate the customer’s needs and provide alternatives, instead of “working your magic” with the keyboard.
Finally, when a customer chooses options from a fully disclosed menu presentation, they almost never cancel them. Why? Because customers don’t cancel products they knowingly purchase. They are also likely to thank you for explaining those products to them, because the last person didn’t.
Eric Judson currently serves as a business manager for Ray Laks Honda in Buffalo, N.Y. A graduate of the State University of New York at Buffalo Law School, Judson will be admitted to the New York State Bar on June 22. Email him [email protected]