During the 2019 P&A Leadership Summit, F&I Sentinel’s president and CEO, Stephen McDaniel, presented “Lender F&I Product Review and Approval — What You Need to Know,” a discussion of the review process from the perspective of auto finance sources and federal regulators.
"I think at the end of the day, everyone involved in the distribution of these products wants a compliant product because every step of the way, everybody has some skin in the game, and it should be everyone’s goal to ensure that these products are being sold compliantly with state and federal laws."
We caught up with McDaniel post-Summit, switching gears from the PALS stage to the pages of P&A, to hear about his presentation and gain an in-depth understanding of the process.
Stephen, can you tell us about yourself and the career path that led you to F&I Sentinel?
I became an attorney in 2004 and since that time I had a stopover at the Florida Supreme Court clerking for Justice R. Fred Lewis and then went right to work for an insurance regulatory law firm. Based out of Tallahassee, Fla., my entire legal career, Florida historically has been one of the most difficult states for extended warranty service contract obligor companies to do business in, so my legal practice gravitated towards these F&I products, primarily because it was difficult for those companies to do business in the state.
Prior to going to law school, I was a CPA and worked for KPMG. I graduated undergrad in 1999 with a finance and accounting degree, so I have a background in the finance world as well. As a result of that it seems like my practice started to focus on these F&I products, and as I began to work with manufacturers to help develop their F&I product programs.
Fast forward to 2010 when Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act and the advent of the Consumer Financial Protection Bureau, and my manufacturing clients began to inquire of me as to how they could address the risks associated, real and perceived, with the financing of F&I products. Finance companies were beginning to see CFPB consent orders referencing these products and were struggling with the best way to put in place a comprehensive compliance plan surrounding the financing of the products.
So for 10 to 15 years now, my practice has been primarily focused on F&I products, which would include anything from GAP waivers and service contracts to vehicle protection products. Anything under the umbrella of what P&A Leadership Summit covers is what I do, day in and day out, as an attorney.
And that led you to present at this year’s conference. How was that experience?
I enjoyed the event. I like the opportunity to see everybody. You guys have a good group that we typically deal with off and on, so it was good to chat with them, and I think they got some of their questions answered that could help them long-term.
I’m a frequent speaker on the conference circuit. The Warranty Chain Management conference, they’ve had me there … Oh, man, a long time now. I also speak at the conference that GPW and Associates puts on in Arizona, and there is a warranty conference in Nashville I will also speak to. Anything warranty, GAP waiver, or service contract related, over the years, I have probably touched those conferences one way or another.
So share with us what you’ve spoken at all these conferences about. What is it that product providers need to know about the way finance sources review and approve F&I products?
The lender F&I product review model really captures multiple finance sources, and that’s why the term “lender” is used. Because it’s not just captive finance companies, it’s also depository institutions and non-depository, non-captive finance sources, that, over the years, since Dodd-Frank was enacted by Congress in 2010, have had more scrutiny placed on F&I products and the financing of F&I products.
Lenders that are financing automobile purchases — and these products, as a result — have really started to take a look at the risks they are seeing, both in connection with state examinations of their business as well as at the federal level. In doing so, lenders have realized that they need to ensure that they have a comprehensive compliance system in place so that they’re not financing these contracts blindly, and that they are doing some minimum level of review to make sure that consumers are getting something of value and that the products are compliant with state law, and to the extent applicable, federal law.
You referenced the CFPB’s Automobile Finance Examination manual throughout your presentation. How does that play into this process?
Under Richard Cordray, who was the prior director of the CFPB when the original Automobile Finance Examination manual was published, we noticed that there was a specific module that related to the financing of these products.
Fast forward to the Trump administration and Director Kathy Kraninger overseeing the CFPB and the bureau rewriting the manual. I think part of what the F&I industry expected to see was maybe a lessening of the guidelines directed towards these products as well as the overall scope of the examination. I think many in the industry felt like the Cordray-led CFPB was overreaching and overbroad in terms of what they were doing with their examinations.
So it was interesting to see when the newly appointed director published a revised version of the Automobile Finance Examination Manual, that it was identical if not more detailed with respect to processes and questions in place regarding the financing of F&I products that are required of these examiners. The manual is a good example of the fact that the scrutiny remains in connection with the financing of these products.
Talking to people at these conferences is one of the reasons we believe that the lender product approval process is probably not going anywhere. The risk still exists. We see the CFPB consent orders and blogs that address these products and the financing of them. So I think because of that, finance sources have no choice but to stand up and take notice and make sure they’ve got things in place to address those risks.
And again, that exam manual, that’s not a suggestion for these examiners. Those are the processes that they are directed and required to go through.
Knowing the process isn’t going anywhere, what does that mean for F&I product providers?
First and foremost, always make sure you are having someone, either internally or externally, conducting legal compliance reviews in all of the states where you offer products, or where the products could potentially be sold. Regulatory compliance is key, obviously.
The other thing I would say, that at least for the F&I companies that we are working with, we always tell the registered users and the F&I product providers to pay attention to what we call “minimum business requirements.” Those are the finance companies’ minimum requirements in order for an F&I product to be eligible for financing. These minimum business requirements, or MBRs as we refer to them, try to address UDAAP risks — for Unfair, Deceptive, or Abusive Acts or Practices — identified through a review of CFPB consent orders and state examination findings in connection with the financing of F&I products.
These MBRs are typically created through the finance companies’ evaluation of what is going to result in value to the consumer, and in reviewing consent orders from the CFPB and state examinations and trying to create rules to address risks identified through the review of those consent orders and exam findings.
So paying close attention to those MBRs is key for F&I product providers because, in some instances, you might have a product that complies with a state law, but maybe that state law doesn’t have a lot on the books with respect to what types of disclosures need to be in a contract.
But if a CFPB consent order has illuminated a risk to a finance company, as a result that finance company might adopt a minimum business requirement applicable to the product. Which is why we at F&I Sentinel make sure that those business requirements are posted at all times on our website, so product providers who are submitting for review and approval for funding can always see them prior to doing so.
Are these requirements continually evolving?
We certainly try to keep them consistent. We tell everyone that submits through the web portal that they should always pull down the most recent minimum business requirements. They all have a revision date on them, and they could change. A good example is the Santander consent order issued by the CFPB. That was in connection with a GAP waiver and Santander paid a hefty fine for some marketing and sales practices.
As a result of that, finance companies had to take a hard look at GAP waivers and determine what an acceptable level of risk was for them. That resulted in some of the finance companies we are working with creating new minimum business requirements to address the risk that was identified in that consent order. They do not change frequently, but if there is a consent order or some new exam finding, they will certainly be updated to reflect and address those new risks.
What happens on the occasions when a product does not pass?
During the review process, if a provider submits a product to F&I Sentinel that either does not comply with a state law or does not comply with the finance company’s minimum business requirements, that filing of the product will be rejected and a note will go to that provider informing them their product did not pass the test for whatever reasons.
That product provider can come back to us, correct those issues and resubmit the product, and hopefully receive approval upon resubmission. If the products do not fully comply, F&I Sentinel’s job is to ensure they are not in an approved status, so they would not be eligible for funding.
It sounds like F&I Sentinel plays a crucial role.
Yes, I would say for the finance companies that are using us, it is definitely a crucial part of the process. And it’s why we wanted to come out and speak at conferences like yours, so product providers are able to ask questions, that they are aware of the web portal and that they know how to use it. Because at the end of the day, in order to receive funding from the finance companies that are using the portal, it’s important that they are able to get that product approved.
From a finance company’s perspective, I think looking to that Santander consent order is a good example. We don’t work with Santander so I do not know what process they might have in place, but one of the items that was addressed in that consent order was the CFPB directing Santander to come up with and implement what they called a “comprehensive compliance plan.” It was intended to ensure that the marketing, offering, and providing of GAP products does not run afoul of the UDAAP prohibition found in Dodd-Frank.
So part of that comprehensive compliance system can be a review process. And our understanding is that having a review process in place certainly goes a long way towards an examiner saying this company is doing something to address the risks that the regulator has identified in relation to the financing of the products.
Has there always been a set product review process?
I think the reviews really began when finance companies started to see that there were examination findings popping up in state exams on the financing of these products, and then with the creation of the CFPB the urgency to have a review process in place probably increased.
From my perspective, I think many finance companies, they’re in the business of extending credit to consumers so consumers can purchase a vehicle. They’re not experts in these products. So I think many times lenders will struggle to figure out how to address these risks, and that’s where we saw an opportunity to be helpful by assisting the finance companies in creating a process that is consistent from state-to-state, product-to-product provider and, hopefully, creates a process that is efficient and fast. Helping providers get dealers the F&I products they want to offer in their offices, ensure that those products are compliant with all applicable laws, and not create unnecessary risk for the finance company.
Quite frankly, I think at the end of the day, everyone involved in the distribution of these products wants a compliant product because every step of the way — be it the product provider, the dealer that’s selling it, or the finance company that’s financing it — everybody has some skin in the game and it should be everyone’s goal to ensure that these products are being sold compliantly with state and federal laws.
What led to the development of your web portal?
Myself and Matt Nowels, my partner in the company, started working on lender product reviews in the background at first. It used to be that there were emails sent to us, we reviewed them and sent them back to the finance company. And then the finance company would turn those reviews around to the product provider.
So I think once we got involved, we took a step back and said there’s a better way to do this. We thought we could streamline it and make it more effective. So we worked to create this web portal, got that set up and began accepting submissions in February of this year.
We oversee that web portal and the attorneys working for the company that conduct the reviews. We train the attorneys that are doing the reviews and work with the finance companies as they develop their minimum business requirements to make sure that we educate them on the risks that are out there and how the industry operates.
I think that is one of the benefits we bring to this process. … We’ve worked with the industry over the years in our regulatory compliance role, and we understand how it works, so we are able to educate the finance companies on that and hopefully develop a process that meets everyone’s goal of getting a compliant product to the market — and to do it as efficiently as possible.
Did PALS attendees ask any memorable questions following your presentation that P&A readers may be thinking as they read this?
You know, I’m a little longwinded, as you probably already know from this call. So I probably took up a lot of the air in the room, but there was one question that was asked by a participant: “How are the reviews conducted?”
I think it’s important to note, and we also talked about it at the conference, all of these reviews are conducted by attorneys. There is not a checklist that a paralegal or assistant is going through to review the forms. There is an attorney looking at the contract and applying the minimum business requirements and the state laws. That’s how the reviews are conducted.
Another question posed was, “Once these approvals are received, then what happens?” The important thing for providers to know is that approvals for the finance companies that currently utilize the company’s services are good for five years and then a provider would need to come back and refile the form or file for whatever new product they’ve got in the market at that time. And that is, of course, unless there is a state law change that might drive a new disclosure or a revised disclosure within a product form in which case approvals would be turned off and a form demonstrating compliance with the new law would be required.
I also shared this with the folks that were at the conference: I think one of our goals is for this process to be as transparent as possible. What we have found since we went live with the web portal is that you’ve really got two buckets of companies. You’ve got companies that will pick up the phone and call us to make sure they understand the process and the rules that apply to the process. And then you’ve got companies that I think, for whatever reason, are a little reticent to do that.
So what we try to tell everyone we talk to, is there is a help email address on the website and our phone number is available on the website. Don’t hesitate to call for clarification if you have questions. We like to help folks understand the process when we can, and I think it’s important for users to know that.