I made the case in last month’s column that “F&I compliance” is a misnomer; we should start calling it transaction compliance, because most compliance concerns germinate or occur in the sales process by salespeople and sales managers, not F&I. As our series continues, I’ll define the issues, share best practices, and show you how to audit for compliance.
For the moment, let’s take a walk to the desk.
Evolution of the Desking Process
Desking facilitates the sale of the vehicle through a structured approach. In this process, the dealer “pencils” the structure of the transaction to move a consumer closer to becoming a customer. Through the negotiation process, there can be anywhere from one to 10 pencils before an agreement is reached.
There are four critical transactional components: vehicle sales price, trade allowance, cash down payment, and ongoing payment. Resolving objections to any or all these components moves the consumer closer to agreeing to the sale.
Back when Ronald Reagan was president, dealers used a tool called a four-square and a handful of colorful Sharpies to present the first and subsequent pencils on a single piece of paper. Each pencil iteration used a different color Sharpie so that dealers could track the flow of the negotiation. Some sales managers practiced the ancient art of origami, folding the four-square a number of times to continue presenting subsequent pencils.
Dealers today have an electronic desking option that is much cleaner, more professional-looking to the customer, and easier to follow. In our experience, dealers who still purchase boxes of Sharpies tend to have more compliance issues in the desking process than those dealers who have migrated to edesking.
Potential Issues and Compliant Processes
Two potential compliance issues dog the desking process: discriminatory pricing and payment packing. I’ll focus on discriminatory pricing first and tackle payment packing in a future issue.
The Dark Side threw the industry into a spin a few years ago when it accused some of the industry finance sources of discrimination based on average rate spread. Through a flawed methodology, this agency asserted that certain protected classes were discriminated against because the average APR spread was higher for that class than for the rest of the population in the finance company’s portfolio.
Dealers are well-served to establish a desking policy which defines the accepted process and obtains every sales manager’s acknowledgement of and agreement to abide by the policy.
While not foolproof, the best defense against allegations of discriminatory pricing is a defensible first pencil methodology that is applied consistently, regardless of ethnicity, sex, age, or any other protected classes under the Equal Credit Opportunity Act.
An effective desking policy acknowledges that one of three conditions are present when developing the first pencil: a credit bureau report has been pulled, the credit bureau has not been pulled, or the customer has been approved by a finance source at a rate the dealer intends to place the deal with.
Knowing which condition exists steers the sales manager to the correct APR to use to calculate the payment. If the bureau has been pulled, and the credit score is known, the dealership should have a rate matrix in place which provides the APR to be used for that transaction. A sample rate matrix looks like this:
|Over 700||Captive rate plus 2%||
Captive rate plus 2%
|650–699||CR plus 2%||
CR plus 2%
|600–649||CR plus 2%||CR plus 2%|
|Under 600/no score||CR plus 2%||CR plus 2%|
The captive rate can be the manufacturer’s captive’s rate for that bureau range. In the absence of a captive, a dealer can use their primary finance source’s rate. It is important to develop the rate matrix using this source’s rates.
It is powerful testimony for a Ford dealer, for example, to say that their rate matrix was developed using the Blue Oval’s rate structure. Jurors understand that. It is also defensible because I can testify that, if the customer accepted the terms on the first pencil, and the captive approved the deal as called, then the captive can fund the contract.
You should adjust the bureau bands to reflect your market’s demographics.
Next month, we will continue this discussion with best practice process when a bureau is not pulled or when you have an approval in hand, as well as how to audit for compliance.
And yes, good luck and good selling!