Govern or Be Governed

On Sept. 9 at Paris Las Vegas, attendees gathered with high expectations for the first panel discussion of the 2015 P&A Leadership Summit. “Govern or Be Governed” promised to tackle the question of the Consumer Financial Protection Bureau (CFPB)’s likely involvement in F&I products and what the industry should be doing to prepare for it.

Tim Meenan, managing shareholder of Meenan PA, served as moderator. He was joined by Steve Amos, president of GSFSGroup; David DeCredico, senior vice president of business development for EasyCare; Doug Frey, executive vice president and COO at Allstate Dealers Services; Mark Macek, president of United States Warranty Corp.; and Kelly Price, president of National Automotive Experts (NAE).

The group appeared to rather quickly reach a consensus: Yes, the CFPB will eventually set its sights on the F&I product segment, and only proactive steps, taken immediately, can help mitigate the potential challenges that will result. With terms such as “tyranny” and “czar” being used freely, it was not difficult to gauge the panel’s collective opinion of the agency or its leadership. At one point, Meenan noted that, for providers, however the situation is approached, there is a good chance that it would be a lose-lose proposition.

“Either the sales guys are going to shoot you in the back or regulators are going to shoot you in the back, and you’ve got to decide who you want to get shot by,” he said, adding that he doesn’t believe providers and administrators should just stand by and let it happen. “I don’t think we bargained on the CFPB. We all felt pretty safe and secure, and now we’ve had a paradigm shift. We’ve had to really look at some of these issues, and they raise a lot of interesting questions. We know these are thorny subjects with no easy answers.”

The Nitty Gritty

To get things started, the panel tackled the most basic question: Will the CFPB apply its controversial disparate impact analysis to ancillary products, including the full range of products sold in the F&I office?

“About a year ago, this came up on my radar,” said Frey. “We should all be looking at the impact the CFPB would have on our industry. I think we want to preserve our whole industry, so I recommend that all of you take the time to really study the issues and come up with a strategy for moving forward. The strategy we developed was really to tackle disparate impact first. That’s the biggest thing they’ve gone after in the finance companies, so we developed what we are calling ‘retail pricing guidelines’ for our agents to deliver to the dealers. We put a recommended ceiling on service contracts and on what the markup could be for the ancillary products, including GAP. Incidentally, we believe GAP will be the most likely place the CFPB will come after people in our industry, because of the tie-in to the finance contract. The first thing our agents said when they got the new guidelines was, ‘We can’t go into the dealers and do this.’ But after having a few agents who sit on our council go through them and help us develop a strategy to educate the dealers, they started to realize we’re not just doing it to put the providers in a better spot. It’s really to help dealers be more compliant.”

Frey emphasized that the guidelines were designed to convince dealers to charge every customer the same amount to eliminate even the possibility of charges of discrimination. He also noted that this doesn’t mean never having any pricing variations. Rather, he said, dealers need to make sure they’re documenting any changes and the specific reasons for them. For example, if the dealership runs a special of the week on trucks, so the markup on F&I is a bit higher to make up the difference, that needs to be well-documented, and the dealer needs to be able to show that the changes were made for every customer who walked in the door during that promotion.

In Florida, Macek noted, his company actually worked with lawmakers to amend certain rules to include ancillary products in an effort to get ahead of possible CFPB regulations. Those changes include having dealers and providers file the rates and retail pricing of the products so consumers can’t be over- or undercharged.

“We were able to work with the government state insurance office to get statutes passed that protect dealers and providers, while at the same time ensuring they are actually fair to the consumer,” Macek said. “There are some providers and agents that will pay different commissions to the dealership — to secure the business or meet a requirement for reinsurance, retro or walkaway — so we have to deal with that issue as well. But I think this kind of approach is the way to go.

“Florida eased up on having the rates on file with the government, but you still have to have on record somewhere what your rate is, and you cannot deviate from that. You cannot mark it up or rebate to the consumer. And, actually, it has helped keep the F&I profit per vehicle on an even keel. There are no more highs and lows to contend with. I don’t know how big of a task it would be to pass this kind of legislation in all 50 states, and I’m not sure the industry even wants to go that route, but that’s how we operate in Florida and it seems to work pretty well.”

“The reality is that, whatever path the industry takes, it’s going to require a coordinated effort on the part of providers, dealers, F&I departments and technology vendors,” noted DeCredico. “You always beg the question: If the CFPB can and does put some limits on F&I, what’s the appropriate markup? Who’s going to say how much you can make on a product, whether it be tire and wheel or dent repair or anything of that nature? There is technology in place to handle this situation, however. In the state of Florida, we have a blueprint for how to apply rate consistently across a large area with multiple locations. So the real question is going to be, are you willing to walk away from potential business if your markup isn’t satisfactory to what the dealer may want, or if they think they can get a larger markup from someplace else?”

Amos noted that the conversation needs to go beyond just markup, however. “The only price limit [finance companies are] regulating right now is how much you can mark it up. But that doesn’t solve the disparity issue and that’s the longer-term concern,” he said. “I think in the end, it’s either going to be the finance companies regulating us or we can regulate ourselves, which would probably be the best solution. One of the solutions we’re looking into is to have individual dealers or dealer groups each with their own set of prices, so that they’re consistent across the marketplace. That probably would be a better solution than our industry having to come in and do it, but the question remains: Is that going to be a viable long-term solution?

The Value Proposition

The panel then shifted gears to take a closer look at the value of the products themselves, another area many fear the CFPB will target. Meenan said there’s no denying the value of a $600 GAP policy that ends up getting $5,000 waived on a loan, or a consumer paying only $2,000 for a service contract that covers $14,000 worth of repairs. The problem comes when looking at products where, potentially, a customer could pay $500 for a contract that brings a maximum benefit of $400.

“I think the products themselves have value, and I think it’s up to us and our dealers and agents to help educate consumers and regulate some of those pricing issues,” Price said. “We have had situations where a product that has a $4,000 benefit was being sold in F&I for $5,000 and we’re very quick to reject that contract. I think we, as a group, need to make sure none of that is happening at the dealership level. Those lawsuits hurt all of us. We need to get together as a group, set the standards and best practices, and say, ‘This is our suggested retail markup.’ We have to get those set prices and not allow the F&I manager to move it up or down, or control what products are offered, making sure every product is offered to every single consumer at a reasonable price — if not the same price — every single time, with no variance between consumers. It would be nice to know we’re all protecting each other and not allowing dealerships to sell any products above their stated value.”

One thing to keep in mind, the panel agreed, is the full value of the contract. They discussed the example of a $1,000 key replacement contract which, if it only gives the consumer the opportunity to replace a $400 key fob once, is not going to stand up to scrutiny. But if there’s no limit to the number of times that key fob can be replaced under the contract, the value to a car buyer such as Meenan, who admitted he has “lost track” of the number of times he has misplaced his own keys, would be abundantly clear.

A Community Affair

One of the issues all the panel members agreed on was that any sustainable solutions would require an industry wide consensus. One or two providers who are going it alone might find workable short-term solutions, but the larger problems the CFPB could conceivably pose won’t be solved without a team effort.

“How can we do this as a group?’” Frey asked. “We need to say ‘Here are the standards we’re all going to use and here’s how it’s going to work.’ In order to be proactive — which is what I think all of us on the panel are trying to do — we probably need to even go a step further and fund someone to start working on developing standards before the CFPB actually comes after one of us.”

“I also think that if we could find some common ground, at least by dealership, if not for the industry as a whole, it would make a difference,” said Price. “Then you know, as an F&I manager, that the price you’re selling the product at is the same price the F&I manger in the next office is selling it at. It would give the F&I manager a lot more confidence — as well as the salespeople and anyone else in the dealership — to know there is nothing to hide. You’re not in a snake oil-type business. You’re selling products with value. When you’re standing at Best Buy and they offer you something, the guy at the cash register doesn’t get to go ‘$99, $89, $79 — do I have a buyer?’ They know what the price is, they sell the value and they have confidence in the product. It would give us all a lot better ground to train from if we had firm pricing, and it would, in turn, offer that confidence to F&I managers.”

Meenan raised the issue of exclusions as well, citing CFPB-issued orders against DFS and US Bank regarding GAP insurance. In the order, he explains, the companies were fined because they hadn’t listed every part on a 10,000-plus part engine that weren’t covered.

“In fact, I went and pulled the actual brochure on this program, and it was pretty well done,” Meenan said. “It said, ‘Not everything is covered. Please check your terms and conditions carefully for what is covered and what is excluded.’ And it was there in fairly large print. And they got fined for not telling them every single part. Elsewhere in the order, [the CFPB] said, in the future, they at least have to describe the nature of the exclusions; just saying there are exclusions isn’t cutting it anymore. And I don’t believe they intended it to apply only to direct marketing. They meant it for point of sale at the dealership.”

“Wow,” Amos responded. “I think a lot of us have contracts where we have new-car coverages that are basically an extension of the factory warranty, and then we list in general what’s not covered. And we think we’re good. But when you read or hear about something like this, where you have to list all the parts, it’s concerning. I think we’re going to have to work with our associations to collectively find the best type of disclosure. And we’re going to have to be willing to sacrifice some things to get there. Up until the CFPB and discoveries like this one, we felt very secure in the way our products were priced. We stated that everything that is covered is written down and anything that is not written down isn’t covered. But if the CFPB is going to be looking for everything that’s not covered as well, that’s going to take a lot of reset. It will take a lot of effort on all of our parts to gather all of that data, and I would like the associations to get involved as well.”

“There’s so much emphasis in the industry right now on speeding up the time consumers spend in the F&I office,” DeCredico noted. “And this seems to be a little contradictory. It means you would have to take the time to go through and list every single exclusion that may cause a denial of claim. I think the area we should focus on most is the way we train and develop the F&I offices, to move away from very broad language like ‘bumper to bumper’ or ‘If the vehicle breaks down, everything is covered.’ I mean, those are the things we’ve all heard about for years and years, but it gets back to the issue of training.”

“So much in the contract these days is listing those exclusions,” added Macek. “You want to make sure you’re adequately disclosing to the customer where the coverage doesn’t apply and what circumstances or parts aren’t covered. So I think the tendency is to probably going to be to err on the side of caution to make sure that you are, in fact, providing as much information to the customer as possible.”

All in This Together

Meenan noted that the way the CFPB operates is very different from any other agency the industry has worked with before. In the past, he said, providers could sit down with their state insurance commissioner and have a chat, getting feedback to ensure both the products and the way they were sold was fair to everyone involved.

“But if you go to the CFPB, they’re not a provincial regulator,” he said. “They’re not interested in the survival of our industry. They do not feel there’s egg on their face if they destroy a particular segment or a particular industry. So you cannot get an answer even on basic issues. Their answer comes in the form of a simple investigative demand and anything you talk to them about is just giving them free discovery.”

He then asked the panel whether the best option would be to not only band together as an industry to find better solutions, but to ask dealers and the finance companies to join the effort as well. Amos was quick to agree.

“Right now, there are certain legal opinions that the CFPB doesn’t have regulation over our products and our industry,” he said. “Certainly they can go through the finance companies, but I think they’re eventually going to look at us. I think, as an industry, we’ve got to band together and prepare.”

“I think you’ll find the vast majority of dealers are very willing to get involved,” said Macek. “To me, they’re all very intuitive. The presence of the CFPB is impacting them already. So I think that, as an advisor to a dealer, it’s your responsibility to make sure they’re aware of what the issues are and what potential safeguards should be put in place to help them be successful in the future.”

“I think the dealers right now are very willing to listen,” Price agreed. “They are seeing what’s happening in the finance industry and they know it’s probably going to come down to F&I products at some point. Whether it’s the CFPB or the attorney general or the Department of Insurance, somebody is going to regulate us. If we do it proactively and give everyone in the automotive industry ideas on the best practices we can implement together — through our agents and through our associations — then we can avoid the catastrophe of one of us having to be the Ally Financial of the F&I segment and get our hand slapped the hardest so everybody else then takes action.”

“I know some people at Ally and their thought, when the CFPB came in, was that they were going to help the company be more compliant and provide information on what needed to be fixed. So Ally actually shared all their data, thinking there wasn’t going to be a fine,” said DeCredico. “They cooperated to the fullest and then got hit with a $98 million dollar fine. I think we have to come up with standards and best practices on our own. And I think we have to do it in conjunction with everyone else in the industry, because we certainly can’t do it with the CFPB.

“The whole idea of ‘govern or be governed’ — I think we have to try to govern ourselves as much as possible before the CFPB comes in and tells us how to do it,” DeCredico added. “And maybe if we do enough, and do it soon enough, and do it the right way, maybe they’ll go on to some other areas and not come after F&I.”