I wrote on this topic more than a decade ago, and although my thoughts now remain consistent from the earlier piece, I am putting myself out there by adding some pricing guidelines.
What can I expect from the CFPB?
The topic has resurfaced as the questions are flowing surrounding the potential changes in the regulatory and compliance landscape since the recent election. The good news is that if a dealer is acting as a good citizen, there may be occasional transactional mistakes, but nothing approaching the “bad actor” status like some of the dealers the Department of Justice (DOJ) and the Federal Trade Commission (FTC) took out under the Trump administration.
The bad news for the bad actors is that the expected regulatory reboot may indeed take them out. The one question I am asked most frequently recently, is some variant of “What can I expect from the CFPB?”
My response — the big elephant in the room — is to expect a deep dive into voluntary protection product (VPP) pricing and a resurrection of attacks on dealer reserve. I believe this to be the case since I’ve heard the same rumors you have, and because these are the last pieces of the vehicle sales and financing experience that does not have readily available pricing available to the consumer.
The MSRP is required to be posted on new vehicles, with the price point visible. Retail values of used vehicles are available on the internet, with the price point available. You cannot find the buy rate or the F&I cost of VPP anywhere.
Dealer reserve is a topic unto itself, as I will focus on the VPP pricing issue.
Reasons Regulators Want to Regulate
There are a few reasons I believe the regulators want to review VPP pricing. First, I don’t believe they understand the value of the VPP for the consumer and view it as just an opportunity for dealer to take advantage of consumers.
I suspect, as the regulators suspect, that there may be some potentially discriminatory pricing in place when dealers have the flexibility to negotiate on VPP prices by transaction. After all, they seem to be very suspicious of our industry.
Finally, if I were a regulator and did not trust the automotive industry, and knew that VPP prices are not regulated, I would likely think the dealers are charging way too much money vis-a-vis the potential value of the VPP itself.
Self-Regulate and/or One-Price
Self-regulating your VPP product pricing caps is probably the best approach to establish a potential defense against excessive profits claims a regulator could bring. One-pricing your VPP product pricing ensure that everyone pays the same price regardless of Equal Credit Opportunity Status.
Florida is a Case Study
Most of the VPPs sold in Florida are subject to filed rates. The state does not impose pricing for the products with the exception of Credit Life and A&H like every state does. Instead, the product provider is required to submit rate schedules with the state, who in turn approves the rates. Once the filed rates are approved, the F&I manager must sell the VPP for the filed rate, no discounts or increases allowed.
Not a Florida Dealer?
If you are in one of the other 49 states, and are not subject to filed rates, you can and probably should establish your own VPP filed rate schedule. I cannot provide a customized rate schedule for every dealer in one article, but I can provide what I would be willing to testify what I consider to be industry standard.
This concept is considered important when defending business practices. The following standards range from conservative to aggressive, depending upon how much business risk a dealer wishes to take.
- Vehicle Service Contracts: Mark-up limited to 100% of cost to F&I department (may include dealer pack) or $1,500-2,000, whichever is greater.
- GAP: Finance source or state limit, whichever is less.
- Maintenance: Mark-up limited to 100% of cost to F&I department.
- Ancillary: $500-600 above F&I department cost.
One particularly important key to implementing pricing guidelines designed to generate a fair profit and developing a defense against potentially deceptive practices is to require and ensure consistency. Do not let one rogue F&I manager think her or his name is on the building and set their own rate schedules.
Implementing pricing guidelines is not a guarantee that the regulators will stay away, but properly implemented and managed, it should provide a plausible defense of your F&I pricing practices.
As always — stay safe, good luck, and good selling.
Gil Van Over is the executive director of Automotive Compliance Education (ACE), the founder and president of gvo3 & Associates, and author of Automotive Compliance in a Digital World.