At the beginning of the year, I made the case that “F&I compliance” is a misnomer; we should start calling it “variable ops” or “transaction” compliance, because most compliance concerns can be traced to the showroom — or the desk. Let’s conclude that thought and this series with compliant processes for unpulled and pre-approved customers.
The Buck Stops Here
Last month, we discussed a compliant process if the bureau has been pulled. Two other outcomes are possible:
• Bureau not pulled: If the bureau has not been pulled, the credit score is not known. The dealer must establish a default rate. Some query the DMS to calculate the average rate for new and average rate for used transactions over the past 90 days. This approach requires the dealer to calculate and change the default rate monthly.
A second approach is to use the captive’s rate for a 678 bureau score. That’s the U.S. average and, in most cases, the captive’s Level 2 buy rate. Minnesota dealers may find this APR a little high. Minnesotans have America’s highest average credit score (718). Dealers in that state can use their captive’s Level 1 buy rate.
The third approach is to pick a number between zero and your state’s max. Zero percent leaves the sales manager with less flexibility as more info is obtained, whereas state max can cause some consumers to walk away too early in the process.
Depending on demographics, some dealers use 6% for new and 9% for used; others 9% for new and 12% for used. Either approach works from a compliance perspective and, reportedly, from a sales perceptive. Your rate can be saved in most edesking software systems as the default. Apply it consistently based on the information known at first pencil.
• Approval in hand: Let’s say the customer has been submitted to a finance source and approved. The timestamp on the desking worksheet will follow the timestamp of the approval, which documents for the dealer’s defense that the exception to policy was due to supplemental information.
Acceptable exceptions to using the rate matrix or the default rate must be documented. A customer could walk in with a pre-approval the dealer intends to accept, for example, or state that she has been approved at her credit union at 3%. “Quoted at customer rate of 3%” is the defending point on the worksheet.
It is not acceptable to use the approach that one general sales manager once shared with a straight face: “I can tell you their credit score just by looking at them.”
Consistently using this first-pencil methodology should help convince a jury there was no intent to discriminate against any consumer.
Audit the Output
An important piece of a defense to discriminatory pricing is auditing the output of the process. Sales managers must correctly and consistently pencil deals as outlined in your desking policy — every sales manager, every deal.
If a sales manager is not applying the policy consistently, corrective action flows from a verbal notice accompanied by additional training, to a formal writeup of variance to standard policy, to a demotion taking ups, to termination over time.
The audit process starts by randomly selecting 5% of a month’s deals for each sales manager. For Sharpie dealers, this means finding the four-square and using your best cryptography skills. Which color is used for first pencil? Which key terms of the transaction were used to calculate it? Often the APR will not be disclosed, but the payment is usually clearly written next to the smiley face. Use the payment at the lower end of the payment range.
Using the sale price, trade allowance, trade payoff, cash down, rebate, term, and payment, back into the APR that corresponds to those terms. Some sales managers will also print the first-pencil desking screen from the DMS. Compare the APR you calculated or the APR on the screen to your policy for consistency.
If your dealership uses edesking software to generate the first pencil, the software retains the history of each payment quote developed. Find the first pencil that was printed in the edesk, determine the APR what was used for that first pencil, and compare it to your policy. Edesking also provides the timestamps of each pencil, which can be compared to the timestamp of the credit bureau report or the approval from a finance source.
Consistently applying a sound, defensible first-pencil methodology is a solid defense against claims of discriminatory pricing. It also helps to sell vehicles with a profitable deal structure.
And yes, good luck and good selling!