F&I Faces Regulatory Uncertainty

It is tempting to speculate that the regulatory environment for the auto finance industry in the months ahead may be more favorable. Don’t count on it.

A recent federal case held unconstitutional that portion of the Dodd-Frank Act which permits the Consumer Financial Protection Bureau (CFPB)’s director to be fired only for cause. This decision has been appealed to the entire federal D.C. Circuit Court. And they won’t even hear arguments until late May. Although President Trump’s Department of Justice has filed a brief in support of the earlier decision, it is unlikely that he will remove Richard Cordray as CFPB director until the full court rules sometime later this year, assuming they affirm the lower court’s ruling.

Various bills have been introduced in Congress to cut back the CFPB’s authority in one form or another as well. One of these bills would eliminate the agency’s authority to bring enforcement actions for unfair, deceptive and abusive practices, which is the basis for challenging many aftermarket or add-on product sales.

These bills will most likely be subject to filibustering in the Senate and require 60 votes to close off debate. It is questionable whether enough Democrats would join Republicans to make more than simple changes to the CFPB, such as making it subject to congressional appropriations instead of being funded as a percentage of the Federal Reserve Board’s budget as it is today. With issues such as immigration, reforming Obamacare, and the federal tax code getting more attention, the timing of any CFPB legislation before the summer is questionable.

Remember also that the Dodd-Frank Act gives state attorneys general the authority to enforce Dodd-Frank consumer protection laws as well as state law. The most likely regulator to show up at your door is your local attorney general. Some AGs, like those in New York, Massachusetts, Illinois and California, have been very vigorous in policing what they consider to be unfair, deceptive or abusive practices in aftermarket product selling.

Did you know that the National Association of Attorneys General has an auto finance subgroup that looks at auto dealer conduct and ways to police it? Aftermarket products are high on their agenda. The Federal Trade Commission (FTC) is also actively looking at aftermarket product selling by dealers.

Best Practices in the Current Regulatory Environment

The value of products sold to consumers, how they are sold, and discrimination issues if products are sold on different terms or different prices to protected classes of consumers are likely going to continue to be the focus of regulators as well as plaintiffs’ lawyers. For example, there is a case pending in West Virginia challenging the value of etch as an effective theft-deterrent device.

Here are some practices you may want to consider to mitigate these risks:

1. Don’t Be “That Guy”: The New York AG has collected over $17 million since 2015 for deceptive sales of a credit repair and identity theft protection product. The provider was put out of business, leaving the dealers to foot the bill. Don’t be that guy.

Do you stand behind your products and have the financial ability to do so? Are you up to speed on legal and regulatory challenges to aftermarket product selling and have your scripts been vetted by legal or compliance professionals? Can you prove that to the satisfaction of your agent and dealership clients? What is your track record with litigation and claims?

2. Value to Consumers: If challenged by a regulator or in court, could you credibly defend the value of all your aftermarket products to customers in relation to the price and the customer’s needs? What steps do you take to prevent price gouging involving your products?

Some products such as extended service contracts can protect the customer from expensive repairs since many vehicles today are so computerized that entire systems need to be replaced if something goes wrong. This can cost over a thousand dollars.

The days of routine wrench and socket repairs are coming to an end. Other products like etch may be more difficult to defend. To bring the theoretical question down to brass tacks, what is the average customer-paid service repair charge in your client dealerships over the last 90 days? How does that relate to the selling price of your VSCs?

3. Transparent Explanations. The average U.S. consumer reads at between a 7th- to 9th-grade education level. Have a lawyer or compliance advisor review your selling scripts. Do they clearly and accurately describe the product and its limitations?

Be careful of “slick” fast-talk selling that confuses the customer with misleading math or other what-ifs. Encourage the use of menus that give the prices of the products, individually and in packages, and don’t just sell based on monthly payment amount. That can open your dealership clients up to payment packing charges, which hurt everyone.

4. Discrimination. The CFPB cited aftermarket products as an area they are investigating for the same kind of “disparate impact” credit discrimination they charged with dealer rate participation. Encourage dealerships to charge standard prices by vehicle, and document that expectation.

If your dealership clients lower a standard price for a customer, recommend that they keep a record in the deal jacket of a legitimate business reason why they did so such as a sale on the product by the manufacturer or the dealership. You don’t want to be implicated in potential discrimination by your dealership clients.

5. Consumer Complaint Resolution: The CFPB expects your dealership clients to have a compliance management system (CMS). One necessary element of a CMS is a process to resolve consumer complaints, either with an uninvolved senior dealership officer or a neutral third party.

However the process works, it needs to be able to document who made the complaint, what the nature of the complaint was, the steps taken to address it, and the fact that the complaint is resolved within 15 days. You don’t want the customer filing a complaint with the CFPB, FTC or local attorney general, which is how investigations get started.

Understand that aftermarket product selling is near the top of regulators’ agendas when it comes to the retail automotive business. That is not likely to change very much in the near future. Position yourself and your dealers to reduce the risk of being the next headline.