The combination of two recent events — regulator enforcement action against Ally Financial and a study by a powerful consumer group — prompted FNI Inc. president David Bafumo to outline five points auto finance companies can consider when pricing add-on products.
Those five points included:
—Auto finance providers with captive products are ahead of the curve since preferred or captive products are almost always offered at a non-negotiable consumer retail price ensuring that every customer gets the same product at the same price.
—Monitor discretionary dealer product selection and pricing.
—Develop new guidelines for dealer product selection and pricing.
—Verify accurate product pricing disclosure in funding process.
—Independent dealerships should require additional training and guidelines.
Bafumo elaborated how he arrived at those five elements after he spent much time at last month's industry events in New Orleans discussing them. The impact of the consent order agreed to by Ally dominated F&I discussions at both the Vehicle Finance Conference conducted by the American Financial Services Administration as well as the National Automobile Dealers Association Convention & Expo.
"The Ally consent order (with the Consumer Financial Protection Bureau and the Department of Justice) and a perhaps not coincidentally timed Center for Responsible Lending report on discrimination in auto financing provide much more than a hint of the kind of regulation coming for F&I add-on products and the auto finance providers and dealers involved in their sale," Bafumo said.
Bafumo described the Center for Responsible Lending (CRL) as a powerful consumer rights lobbying group with "philosophy and policy that closely mirrors, or as some have suggested, may directly influence CFPB priorities."
Bafumo explained how he came to that conclusion, reiterating the potential industry impact of the Ally penalty.
"If applied to add-on products commonly sold in conjunction with an automobile transaction, the controversial CFPB data analysis based process for determining discrimination leads to some likely game changers ahead for the add-on product world and the traditional dealership F&I process," Bafumo said. "And that's apparently exactly what the CRL has in mind."
The FNI president cited CRL's own report to make that claim, reiterating that center officials said, "We also call on regulators to collect data on the prevalence of add-on products in car loan transactions and to monitor whether certain groups of borrowers are disproportionately affected by these practices."
Bafumo reiterated that dealer discretion is the issue in the spotlight when it comes to rate markup. But he stressed that "points" aren't the only part of the F&I equation where dealers have discretion in pricing.
While some direct consumer finance companies and subprime indirect providers have set standardized pricing for products (usually for their own captive or preferred products), Bafumo pointed out that most in the indirect auto finance business have long provided only maximum advance caps for dealer sold F&I products like service contracts and GAP. He estimated that the cost would commonly be from $1,500 to $2,500 for a service contract and $500 to $800 for GAP.
"It is up to the dealer on each deal to determine what products fit the deal and at what price," Bafumo said. "It is easy to see that pursuing finance companies under the same philosophy of consumer equality, that the dealer controlled variable cost of similar or the same products to consumers may appear discriminatory, intentional or not, by the same kind of data analysis used to determine disparate impact of rate markups in a finance company's portfolio.
"Further as the CRL's research suggests, it is possible that a disparate impact analysis may reveal a discriminatory result in who actually buys products and who doesn't," he continued.
"Lastly, the issue of complete disclosure of actual cost of products (cash price versus total cost inclusive of financing charges) runs through all of the product related CFPB guidance bulletins, recent enforcement actions and the CRL's Report," Bafumo added.
Bafumo surmised that a new format of standardized disclosure of product terms and especially cost may be the only solution to meeting CFPB expectations, requiring an adjustment to both finance company product underwriting dealer guidelines and to established dealer F&I processes.
Since the advent of menu selling and advancements in F&I technology, Bafumo insisted product pricing at a franchised dealership can easily be standardized.
"But while many dealers have set non-negotiable standard prices for their products, many currently choose not to," Bafumo said. "And there are plenty of sound business reasons not to, market competition and the challenging deal structuring associated with subprime transactions among them."
On the independent dealer side, Bafumo acknowledged that standardized product pricing can be found few and far between because of what he called "a function of the lack of franchised dealer resources in both training and technology.
"Yet even with product menus and F&I technology standardizing product presentations, exactly how product pricing is disclosed is squarely in the cross-hairs of regulators," Bafumo said.
So why should finance companies and dealerships consider Bafumo's five recommendations for the pricing of add-on products?
"Since last summer's first CFPB auto finance enforcement action, it is clear that regulators expect consumers to be advised that adding a product's cash price cost to their loan increases the total cost of the product based on loan term and rate," he said.
"The CRL position takes it a step further, suggesting that the cost of each product be broken out of menu packages with the total cost of each product explained separately," Bafumo went on to say. "The CRL argues that the traditional dealership practice of disclosing product pricing by comparisons in monthly payment (payment with and without product) is insufficient to protect consumers."