F&I’s Code Red

Compliance is a funny word in this industry. But I guess that shouldn’t surprise me, given that the most recognizable names in our little corner of the world belong to an attorney and an individual who founded an association to keep attorneys away.

Of course, Hudson Cook LLP’s Tom Hudson and the Association of Finance and Insurance Professionals (AFIP)’s David Robertson mean much more to our industry than that, but you get my point.

Now, the fact that there’s an industry named after the word “compliance” isn’t what amazes me. What amazes me are the emotions the word elicits. There’s fear, anger and even pride.

I say “pride” because some of you F&I managers wear your compliance knowledge like a badge of honor. I say “fear” because two issues into my career here, I received an e-mail from a compliance expert that read, “IT’S ACCEPTANCE RATES.” The sender’s point was that the word “penetration” was like a homing beacon for regulators and attorneys.

A wise F&I manager once told me that regulations are like the lines in the road, and his job is to keep his dealership in between those lines.

At times, though, it does seem like our industry’s compliance experts make those lines a little tighter, right? In fact, one could say that some of the best practices these experts preach don’t actually appear in any regulation. Take for instance this discussion that took place recently on the F&I Forum about disclosing the base payment on an F&I menu.

The question came up in October, after Automotive News published an article about F&I’s 7 Deadly Sins. Yes, we published a similar article back in 2008, but we don’t mind inspiring our competitors every now and again. Hey, it was a good piece, and it’s still well worth a read.

What had everyone up in arms was one section of the article under the heading, “Noncompliant Menu Sales.” What followed was a warning that F&I managers are required to disclose the base payment on the menu. The gang didn’t disagree that it was a practice worth following. Their beef was that nowhere in the 19 and growing regulations we face on any given deal is there any guidance about how menus should be used. And don’t think they didn’t look.

The gang tore apart Regulation Z. One member even posted the regulation’s actual language. There was not one mention about any menu. Searching the Truth in Lending Act didn’t reveal anything either.

It kind of reminded me of that scene in A Few Good Men. You know, when Kevin Bacon’s character asks Cpl. Barnes to locate the chapter in the Marine Corps’ recruit training manual where the term “Code Red” appears. Well, like Code Red, the need to disclose the base payment on the menu doesn’t really appear in any rulebook, but that doesn’t mean you shouldn’t do it. Via e-mail, I asked the AFIP’s Robertson to weigh in.

“What the federal regulators expect is for a consumer to be informed as to what the vehicle will cost on a monthly basis, based on a representative and statistically verifiable APR and term,” he wrote. “And it has to be just the price of the car, not the price of the car and a hidden vehicle service contract or some ‘leg’ for the F&I department.”

What Robertson is referring to is payment packing. What regulators are concerned about is whether the payments quoted during the sales negotiation include F&I products the customer doesn’t know about. It would seem to be a sales desk problem, right? Well, not exactly.

You have to remember that when it comes to court cases, paper trails are key. And when it comes to a dealership defending itself against questions of deception, a written confirmation on your menu that the base payment was disclosed to the customer can go a long way. And that’s what compliance experts are trying to tell you — the more we can document that no deception was involved, the better off we are.

But there’s something else you need to understand. Product providers weren’t spared when regulators in the state of Washington went after dealers for payment packing, so let’s just say they have a stake in this too. Lenders are another reason why you need to button up your processes. Hey, we were spared from the Bureau of Consumer Financial Protection, but they weren’t. So, you can bet they’ll be a little more careful about what they approve going forward.

Listen, we’re entering another period of rulemaking. Transactions that involve financing will be put under the microscope, and deception is what rulemakers are after. So, rather than ask, “Why should we?” ask, “What more can we do?”