Prognostication isn’t an exact science, as evidenced by how wrong pollsters were about the outcome of November’s presidential election. The beauty of being a prognosticator is you can’t be held accountable for being wrong.
Take all those industry articles that came out at the end of 2015 claiming to know how things would play out in 2016. How many of them were right? Not many, I predict. With that said, here’s my attempt at reading the tea leaves for 2017:
Prediction No. 1: “Compliance Management System” Becomes 2017’s Buzzword
Remember how crazy everyone was about the internet before the dot-com bubble burst in 2001? Just about every vendor rolled out solutions that allowed them to leverage buzzwords like “internet” and “digital” in marketing pieces and messaging.
I believe 2017 will be the year dealers will finally embrace the need for a compliance management system (CMS). Finance sources have already done so, thanks to the Consumer Financial Protection Bureau (CFPB).
A CMS is nothing more than a structured approach to ensuring compliance with required regulations. Dealers who are compliant with the Federal Trade Commission (FTC)’s Safeguards Rule and Red Flags Rule have already effectively employed a CMS.
Prediction No. 2: The Dark Side Will Not Grind to a Halt
The CFPB may be reined in somewhat, but its charter is still to protect consumers. Whether the bureau has been overly aggressive is for others to debate. In the meantime, it’s business as usual. The bureau will continue to monitor our finance sources.
Unfortunately, that means dealers will continue to feel the effects of the regulator’s activities. It also likely means increased scrutiny of credit application submissions, deal structure, straw purchases, and powerbooking.
Let’s not forget that the FTC recently charged a nine-store dealer group in Los Angeles with payment packing and yo-yo transactions. Lost in all the noise about it being the first time the FTC charged a dealer with yo-yo financing is the fact that the agency has been quietly gathering information on questionable spot-delivery practices for at least five years. I sense more allegations are forthcoming from the FTC in 2017.
Prediction No. 3: Negative Equity Becomes a Compliance Issue
According to Edmunds.com, a record 32% of all trade-ins were underwater during the first nine months of 2016. If this trend continues, dealers will face a couple of potential compliance concerns.
The first involves deals requiring high advances. To get them approved, dealers may start cutting the deal to fit within their finance source’s guidelines. But that cuts into profits, right? This could pose a worse problem for dealers who do a fair amount of employee deals, as you can’t cut the price and still comply with the manufacturer’s employee purchase program.
One possible solution is leasing. Many leasing programs base the advance ratio off MSRP instead of invoice, allowing for greater room when structuring a deal. This, however, leads to the second potential compliance issue.
See, Regulation M, the rule governing lease disclosures, allows for the disclosure of the “prior loan or lease balance” in the itemization of gross cap cost. Some dealers tend to increase the agreed-upon value to accommodate negative equity rather than properly disclosing it as the prior loan or lease balance. This can lead to a high frequency of lawsuits alleging improper leasing disclosures.
Prediction No. 4: Subprime Funding Tightens
According to reports, subprime finance sources are gradually tightening funding for their portfolios. When times are good, finance sources tend to get aggressive to build portfolios at a greater speed than normal, causing them to start purchasing contracts outside their wheelbase. Equity lenders start to think they can buy deals at a higher advance ratio if the credit is slightly better, while payment lenders believe their collections departments can successfully collect from consumers who are overextended if there is equity in the deal.
Smart finance sources will recognize this trend — if they haven’t already — and go back to what they do well. For the industry, this means finance managers may not have a bevy of finance sources clamoring for business, which means they’ll have to be a little smarter to get deals done.
So there you have it. Just make sure to pull this column out next January to see how I did. Hey, you have to keep us prognosticators honest.
Gil Van Over is the executive director of Automotive Compliance Education (ACE) and the founder and president of gvo3 & Associates. Email him at [email protected].