Dodd-Frank and the F&I Grey Zone

[The following article includes excerpts from the e-publication, Agent Entrepreneur, with credit given to Toni McQuilken, author of the article.]

As mentioned earlier, the panel that garnered the most attendance at the the F&I Industry Summit was the one titled “Dodd Frank and the F&I Grey Zone”. It tackled subjects such as the Consumer Financial Protection Bureau (CFPB) and other regulatory bodies that impact the F&I office.

As outlined by the panel, the Dodd-Frank act was signed into law in July 2010, and that set into motion the creation of the CFPB, which is the federal agency “causing the most uproar in recent memory”. The problem, and the cause of much anxiety throughout the F&I industry, is that the CFPB has issued only vague, general statements, but hasn’t provided any concrete rules or guidelines that dealers, agents and providers can follow. This leaves a legal “grey area” with everyone uncertain as to what is expected of them.

One of the key points the CFPB is targeting is the issue of dealer compensation and the ability for dealers to price credit. “The CFPB has agreed that dealers should be compensated, but the debate is how they get compensated,” said Andrew Koblenz, executive vice president, Legal and Regulatory Affairs, and general counsel, National Automobile Dealers Association (NADA). At first, he said, they (the CFPB)were looking at the possibility of eliminating it altogether, but once it was explained how it adds value to the consumer, and provides access to credit that many consumers would not otherwise have had, they were persuaded not to slash compensation completely. Now, however, it is trying to find the middle ground where dealers are compensated fairly, and consumers are protected from unfair practices. One question that was raised was whether the CFPB could also attack the F&I products themselves. “There’s a lot of uncertainty out there,” said one panel member. “Everything right now is mostly speculation.” He did go on to note that the agency does not seem to be attacking the value of the products themselves. However, that does not change the need to make sure the product itself is compliant with all state laws where it is being sold, and that the sales practices themselves are buttoned-up. “We need to be careful, and pay attention to nitpicky details,” he said. Details that can be an issue are claiming something only costs “pennies per day” or the cost of a cup of coffee. These can be misleading to the customer.

While the CFPB orders might be vague, the panel agreed that they matter, and they will have an impact going forward on the ancillary products offered in the F&I office. Munro noted that while the agency does not have direct access to dealers today, the access to data is the most concerning. “They cannot go into a dealership [and collect information],” she noted. “But they can find information about the dealership through the sales of finance products, and pass that along to the Attorney General, who can conduct audits of dealerships. “However”, cautioned Koblenz, “there are limits.” He noted that, like Munro, he sees jurisdiction issues coming into play, as to what the CFPB can and cannot do, and where their authority extends, and that could limit the effectiveness of their strategy in the future.

One of the ways the CFPB is targeting dealers and providers is to claim disparate impact – which is when they go back and look at deals already made, and use an algorithm to determine if they believe discrimination happened. In an effort to show compliance, some auto lenders are checking their dealers’ books of business, and sending letters to those they think may be guilty of this. The problem is that it is illegal to collect information such as race when filling out loan or credit documents. So agencies like the CFPB use information such as the U.S. Census, or surnames, to assign race or gender. But, agreed the panel, that process is flawed. It can be misleading at best, and wrong at worst, leading the agency to make policies to prevent unintentional discrimination that might not even exist in the first place. “They have to look at other factors,” said Koblenz. “Things like credit risk – it costs more to place a subprime loan, regardless of race. And there are other variables such as inventory, the amount financed or the term of the loan.” A better metric for determining if everyone was treated fairly, he said, is to look at the dollars – if the goal is to have every deal generate approximately the same dollar amount, then the rates will be all over the place, based on all those credit and financing factors – race doesn’t play into it. Everyone is treated equally, based on their financial standing.

At the end of the day, the CFPB is impacting F&I today, and will continue to have an impact in the future. But exactly what that impact will be long term, not even the panel could say for sure. There are still too many variables in play, and not enough information to go on – the best policy is to stay vigilant and create clear, understandable policies that apply to every loan and every product that is sold through the dealership – so even if a violation is cited, there is a clear paper trail showing the intent to be compliant.