The questions were unscripted, their answers unplugged. This was the scene inside the Sheraton Tampa Riverwalk Hotel during the eighth hour of last month’s F&I Think Tank in Tampa, Fla., where about 65 F&I pros and dealership executives, agents and industry insiders convened to hear six compliance gurus bust the industry’s most prevailing compliance myths.
The panel tackled the 300% Rule — “Offer 100% of your products to 100% of your customers 100% of the time” — addressed the use of backup contracts on spot deliveries, and cleared up confusion about the use of F&I menus. They also debated a range of topics, from the industry’s response to the Consumer Financial Protection Bureau (CFPB)’s attack on rate participation to what the November elections could mean to the men and women manning the F&I office.
“If whoever becomes the Democratic nominee wins the election, there are going to be people who are expecting that president to let the CFPB loose,” said Jim Ganther, president of Mosaic Compliance Services. “It’s going to be a dog-eat-dog world, and dealers are going to be wearing Milk-Bone underwear.”
Moderated by American Guardian Warranty Services’ Robert Harkins, the panel included Ganther as well as Tom Hudson, a partner with the law firm of Hudson Cook LLP; Steve Roennau, vice president of EFG Companies; David Robertson, executive director of the Association of Finance & Insurance Professionals (AFIP); and Michael Tuno, president of ARMD Resource Group LLC.
“Every time I’m on a panel with Tom Hudson, I feel like a rabbi who’s trying to instruct Moses,” Ganther quipped when Hudson disagreed with his contention that the Truth in Lending Act (TILA) doesn’t directly address the use of signed backup contracts on spot deliveries.
The question, posed by F&I Think Tank participant Teasha McMillion, received a chorus of “No”s from the panel of compliance experts. But they acknowledged that how a state defines when a contract is consummated and how it is written will determine the regulatory response. Hudson added plaintiffs’ attorneys to that list of variables.
“One of the basic instructions in the [TILA], in Reg. Z, is that disclosures cannot be confusing and misleading,” he said. “And I think simply presenting two contracts at a time to a customer is a slam dunk and win for the plaintiff’s lawyers if they’re confusing and misleading.”
In response to a question about the Adverse Action Notice requirement, Robertson advised attendees to issue one whenever they are in doubt. He added that notices are absolutely necessary if the dealership decides not to submit a deal because the customer’s credit app shows too little income or the credit report shows too low of a score, but discouraged attendees from engaging in credit decisions.
“Let the lender take a pass on it,” he said. “If you get challenged, you’re going to have to defend what you did.”
When pressed to clarify whether he was advocating that every customer be sent a notice, Robertson responded with an example. “So a customer comes in requesting zero down. We get an approval for $1,500 down and the customer says, ‘No, I don’t have the $1,500,’ and walks. They still need to receive the [notice], because we weren’t able to deliver on the customer’s request and terms.
“So Adverse Action is all about getting a deal done on a customer’s terms,” he added.
Heads shook in unison when an audience member offered up another scenario: After being told by the dealership’s general manager there was “no way in hell” he could get financed because he had no money down and no proof of income, she said, the customer was able to secure vehicle financing at a dealership down the street. No credit was pulled and no Adverse Action Notice was sent.
“You can’t do that,” Robertson said. “Discouragement is as bad as discrimination.”
F&I trainer Gerry Gould said his concern regarding Adverse Action lies with sales managers getting involved in credit decisions, particularly when they fail to retain the documents used to qualify the customer. ARMD’s Tuno said the same is happening in situations involving the Federal Trade Commission (FTC)’s Red Flags Rule. He said the culprit is compliance software. “Dealers feel empowered, as if they they’re being compliant. … But that’s only the tip of it.”
The panel made quick work of the compliance myth that says F&I offices are operating outside the law if they don’t use a menu that displays the base payment. “So there’s no law that says you have to use a menu. There are states like California, which say you have to have a disclosure for base payment prior to consummation,” EFG’s Roennau said, describing the consistent use of a menu-based process as “a very good best practice” because it documents the F&I sales process.
The 300% Rule required a bit more discussion. The panel agreed the supposed rule originated as a sales strategy to get F&I managers to sell all products, but they noted that some state laws have made it more than a best practice. A law in Louisiana, one attendee pointed out, requires that dealers present GAP as an option to all customers. She said that became a requirement following Hurricane Katrina in 2005.
The panel also addressed how some F&I managers use the rule to build trust with customers. Justin Gasman, an F&I Think Tank participant and the magazine’s 2014 F&Idol winner, said he tells buyers putting down a sizable down payment that he is “legally” bound to present a product like GAP. He then adds, “Ethically, I don’t think you need it, and I don’t want to encourage you to purchase it because you’re at 30% loan-to-value.”
Tuno liked everything he heard — except for the word “legally.” As an alternative, he suggested, “I want to give you the full benefit of what we have to offer.”
Ganther put agents in the room at ease when he rejected the notion that F&I product providers and field reps might be violating privacy laws when they audit their clients’ deal jackets. “I would say not because they’re a service provider that’s connected to the service being reviewed. It’s a good practice, but it’s not enough.” Citing Page Two of the CFPB’s updated Supervision and Examination Manual, he said the guide calls for “independent audits performed on at least an annual basis.”
Vying for Toughest Cop
Hudson capped off the session with a message he has delivered many times: “If we’re talking about the part of the business you folks are in, where you’re selling cars off random dealerships using the retail installment sales contract, there is no such thing as a loan.”
The distinction is critical given the CFPB’s fair lending concerns, he said, as using the term “loan” to describe a finance source buying a retail installment contract from a dealer backs an argument the CFPB has made for the elimination of the dealer exemption.
“So the CFPB intentionally conflates those two terms. And I’ve been in a war of words with their staffers for quite a while now about how they are intentionally doing that in order to try to make the dealer be a direct agent of the auto lender,” he said. “So they call these things ‘loans,’ too. It’s an incorrect use of the term.”
Surprisingly, Hudson declined to give the bureau the distinction of toughest cop on the fair lending beat. He also refused to give that title to the FTC, which announced in January plans to interview up to 80 recent car buyers about their dealership experience.
Ganther added that it was his belief that the FTC let the “CFPB get way ahead of the curve” to see if the Supreme Court would uphold the use of disparate impact in a Texas fair housing case, which it did last July.
“I think it’s the Justice Department,” Hudson said.
It was the DOJ that gave the industry its response to the CFPB’s fair lending claims: the NADA Fair Credit Compliance Policy & Program. Based on a fair-credit risk-mitigation model the DOJ developed in 2007 to resolve two dealer investigations, the program calls for dealers to document legitimate business reasons for discounting interest rates from markup caps set by finance sources or state regulations.
Gould wondered if the solution, which has yet to be recognized by the CFPB, might be doing more harm than good, saying dealers are either using the program wrong or to mask questionable rate-quoting practices. “The rate modification form is being misused,” he claimed. “And if you don’t understand what ‘disparate impact’ means, you don’t understand that there’s a lot behind it and you just throw that rate modification into the deal, I think this is dangerous.”
Ganther said Gould’s concern might not matter given the approach the CFPB took in its settlement with American Honda Finance Corp. He said while the captive agreed to lower its markup caps to 1% and 1.25% above the buy rate, the CFPB, in its consent order, “essentially” told the finance source, “If you stay in the range, you don’t have to document a deviation because you haven’t deviated.”
“Like playing the game Operation when you were a kid, well, you’ve got a little bit more room before the tweezers buzz the sound,” he added.
Ganther turned serious, however, when he explained why the NADA’s program and others like it will be critical going forward. “I’ve been waiting for the other shoe to drop,” he said. “I believe that the CFPB wants to essentially say [to finance sources], ‘Don’t buy paper from dealers that don’t have a Fair Credit Program and Policy in place,’” he said. “And I think it’s going to go farther than that: ‘Don’t have a fair pricing program in place for GAP, service contracts, etch, and … credit insurance.’
“But the shoe hasn’t dropped,” he added. “And at this point, I’m just waiting for the November elections.”