In his newest commentary to help finance companies generate the most revenue out of the sale of add-on products, FNI Inc. president David Bafumo spotted what he described as valuable new guidance from the Consumer Financial Protection Bureau in its latest consent order.
Bafumo explained that for the first time, regulators have laid out a “step-by-step” guide to developing a product compliance plan. He noted product value, product transparency, equal opportunity and vendor management remain top issues.
This plan came from the June 19 consent order in which the CFPB demanded that GE Capital Retail Bank, now known as Synchrony Bank, provide an estimated $225 million in relief to consumers harmed by illegal and discriminatory credit card practices. GE Capital must refund $56 million to approximately 638,000 consumers who were subjected to deceptive marketing practices.
As part of the joint enforcement action by the CFPB and Department of Justice, GE Capital must also provide an additional $169 million to about 108,000 borrowers excluded from debt relief offers because of their national origin. This order represents the federal government’s largest credit card discrimination settlement in history.
“The details of the plan, while applicable specifically to Synchrony and the products and allegations at issue, nonetheless provide valuable insight for every finance company involved in the sale or financing of any kind of add-on product,” Bafumo said.
“The order’s compliance plan instructions include guidance for vendor management in connection with the add-on products, and detailed components needed to develop a system to prevent (unfair deceptive abusive acts and practices) UDAAP violations,” he continued.
“How add-on products are sold to consumers and the F&I best practice of offering ‘every product to every customer every time’ are also on point here,” Bafumo went on to say.
According to his assessment of the penalty against GE Capital, Bafumo indicated that regulators took issue with how the products’ benefits, limitations and costs were explained. Furthermore, the bureau questioned why in this case some individuals didn’t get a chance to make a purchase because the products were allegedly intentionally and systematically not offered to a protected class
Bafumo continued his consent order analysis in this first part of a series from SubPrime Auto Finance News by breaking down the compliance plan components indicated in the CFPB action.
1. Include safeguards designed to ensure that the bank’s employees, service providers, affiliates or other agents refrain from engaging in violations of law or regulations in the marketing, sale and administration of add-on products.
Bafumo acknowledged, “Well this isn’t as detailed as we would like. But ‘safeguards’ mean documented procedures that are executed and followed as well as effective to prevent violations.” He noted these safeguards can include ongoing monitoring and auditing.”
For auto finance products, Bafumo explained the order’s language requiring safeguards beyond marketing and sale, specifically to “administration” means developing processes not only for internal and/or dealer network product sales training and program management such as customer assistance and cancellation/refund training, but also substantial oversight and management of the product providers' compliance ability and actual product performance at every point of their interaction with customers and dealers.
2. Address the manner in which the bank informs customers of all fees, costs, expenses and charges associated with the add-on product.
Bafumo reacted by saying, “We’ve been here before. Product costs must be accurately disclosed.
“Here’s the bottom line on cost disclosure no matter what kind of product is at issue,” he continued. “Accurate cost is half the equation for consumers' calculation of product value. Without it, there can be no informed consumer choice and even the best products offered with the most transparent explanation of product benefits and conditions will not meet consumer protection obligations.”
3. Describe how the bank will inform customers of any material conditions, benefits and restrictions related to the add-on product, including how customers who disclose conditions that may make them ineligible for certain products or product benefits will be informed of product restrictions relating to those conditions.
Bafumo explained the bureau’s focus on product transparency — full disclosure of product benefits and limitations — continues on and should by now be a standard in a finance company’s documented product sales policy and sales training.
Furthermore, Bafumo noted that the industry learned this case that during sales presentations, some of the bank’s customers disclosed conditions that impacted the applicability of the bank’s credit protection products' benefits.
“For example the customer may have disclosed their disability or unemployment or other conditions which would limit benefits or make the product valueless to them,” he said. “Synchrony had no scripting or process to handle this information and allegedly some of these customers were sold products they could not actually benefit from.
“This is not necessarily an issue limited to telemarketers working from an inflexible script,” Bafumo continued. “The question of product value remains a top regulator concern — that is, product value to each individual customer. In the auto finance product world, financial institutions are ultimately responsible for ensuring that customers are only sold products that have value to them.”
Bafumo emphasized that documented product underwriting policies and effective product marketing training processes are the solutions to meeting this obligation.
4. Describe how the bank will disclose that by enrolling, the customer is purchasing an optional product with a cost, and that enrolling is not a mandatory or ministerial process.
5. Describe how the bank will ensure that the add-on product's availability is accurately represented.
Bafumo explained these last two pieces of guidance are especially targeted at specific language and practices allegedly employed by Synchrony in the sale of the products at issue. However, he stressed that several underlying policy issues shine through for consideration in auto finance.
“First, optional products must be truly optional and not automatic or slipped into the rapidly expanding pile of required signatory pages in a car deal,” he said. “Customers must know they are buying a product and be given sufficient information to make an informed decision about it.
“Secondly, we learned from a previous action that old school sales language about cost like ‘for just pennies a day’ won't pass regulatory muster,” he continued. “Here, language designed to create a false sense of urgency, like ‘limited time offer’ is found deceptive.
“Parallels for traditional F&I products could include inaccurate or misleading statements about customer qualifications for a particular product, or whether products may be available from other sources or purchased for cash,” Bafumo went on to say.
Editor’s Note: In the second portion of this series dissecting the CFPB’s latest consent order, SubPrime Auto Finance News will highlight Bafumo’s recommendations for vendor management.