Are Your Desking Practices Putting Your Dealership At Risk?

Despite NADA’s landmark victory in getting most auto dealers exempted from direct oversight by the Consumer Financial Protection Bureau (CFPB), it looks like the agency has found a back-door way to make life more difficult for dealerships. The Bureau recently announced that lenders that offer auto loans through dealerships will be held responsible for “unlawful, discriminatory pricing at the dealership level”. The Bureau has indicated that it sees a potential for discriminatory pricing caused by the policies of some indirect auto lenders that allow auto dealers to mark-up lender-established buy rates and that compensate dealers for those markups in the form of reserve. Their rationale is that because of the incentives these policies create, and the discretion they permit, there is a significant risk that they will result in pricing disparities on the basis of race, national origin, and potentially other prohibited bases. A central issue is that lenders traditionally leave it up to dealerships to set the final interest rate customers pay on their indirect auto loans arranged by dealerships. The CFPB guidance calls for additional compliance burdens on lenders who purchase Retail Installment Contracts from dealers and expects those lenders to take “remedial action” with dealers when necessary. As the old saying goes, “stuff” rolls downhill.

Here’s the problem: the CFPB is citing the concept of “disparate impact” - which is purely a statistical analysis - in evaluating potentially discriminatory dealer rate markups. Only the numbers matter, not the intent or even the knowledge of the creditor. So, even if a lender or dealer didn't intend to discriminate, they may still be held liable for perceived discrimination against protected classes. You can be doing everything completely neutral or unbiased but if there is a statistically significant adverse impact on a protected class, you can still be held responsible under the Equal Credit Opportunity Act (ECOA).

The CFPB further recommends that indirect auto lenders take steps to ensure that they are operating in compliance with fair lending laws as applied to dealer markup and compensation policies. These steps may include revising dealer markup policies, eliminating dealer discretion to markup buy rates, and compensating dealers using a different mechanism that does not result in discrimination, such as flat fees per transaction.

As a result of these announcements, at least one major bank has already sent a letter to dealers indicating that it will “periodically review dealer portfolios, addressing indications of potential discrimination”. The letter also stated in part “if you are unable to provide any explanation for the pricing differences, or if we continue to identify unexplained differences in your pricing to protected classes on a prohibited basis, we will consider taking further action”.

Who knows what these “actions” could include - perhaps disruptive audits or even demands for repurchase of a dealer’s entire portfolio?

While it remains to be seen whether this will ultimately affect how dealerships get compensated for arranging financing, it’s clear that the government intends to carefully scrutinize dealer loan-pricing practices.

Now that’s not to say that any of this makes sense. It certainly seems like a stretch that dealers are discriminating against consumers. But keep in mind that while it’s quite likely that allegations of pricing discrimination in connection with dealer participation are questionable at best, the potential liability is real and dealers should pay close attention. Consumer advocates have been pushing the idea that dealer participation is evil for quite some time and the government is obviously buying into it. Keep in mind that while the CFPB may not have direct jurisdiction over dealers, they have working partnerships with the DOJ, FTC. and state attorneys general and could refer matters to those agencies for action against the dealerships. As if that’s not bad enough, plaintiff’s attorneys will almost certainly be on the watch for potential claims of Unfair and Deceptive Acts and Practices (UDAP).

So if your bank, regulator, or an attorney sent you a letter, how would you respond? Following are suggestions on policies and processes that may help favorably position your dealership in the event of a fair lending inquiry.

Implement a desking and fair lending policy at your dealership that addresses how payments are quoted. Dealership personnel need to be careful that the processes they use to quote payments avoid any impression of discriminatory practices. The key is consistency.

·         If the dealership runs credit before presenting the first pencil, a good best practice can be to quote all payments initially with a standard (maximum) rate markup. So, for the first pencil, all customers will be quoted the buy rate for the tier they qualify for plus the established markup (e.g. two points) with variances only allowed for competitive and non-discriminatory purposes. If the rate is lowered in negotiations, the reason for the variance should be documented in writing (e.g. to match a rate offered by the customer’s credit union, or to bring the customer within budget, etc.). This way the dealership can show that their practices are consistent, fair, and non-discriminatory and justify why certain rates were higher than others even though the consumers were in the same tier. All exception notices should be kept in the deal jacket and care should be taken not to state the same reason on every deal where there is an exception made.

·         If the store doesn’t run credit before the first pencil quote, there can be a “store rate” that is used for all customers. This rate could be based on an average rate of sold deals over the last 90 days. Keep in mind that establishing an accurate store rate is difficult due to the wide range of credit tiers, so running credit before quoting rate is a safer fair lending practice. Another reason why pulling a credit report before quoting a payment reduces risk is that in doing so every quote will be based upon the actual credit-worthiness of the consumer. By “guessing” what rate the customer qualifies for, the possibility of making a mistake is greatly enhanced and it becomes more difficult to document a consistent, non-discriminatory process. In cases where you can’t pull credit before quoting a payment, a best-practice can be to inform those consumers that you are quoting a payment based upon their qualifying for “A” tier credit and that they may not qualify.  Any exceptions to quoting rate based on actual credit standing should be documented.

·         Always use a good faith effort in quoting the rate that you think the customer will qualify for. You shouldn’t rely on only the finance department to know rates and program guidelines; the desk needs to know as well.

Use full disclosure when quoting payments. Customers should be given all the necessary deal terms, including the selling price, trade allowance, payoff, down payment, rebates, the amount financed, payment, term and rate. This will also help eliminate the potential for payment packing or UDAP claims. Avoid using payment ranges, especially after credit has been run.

Make sure everyone is on the same page. If rates are quoted at the sales desk, that rate should not change in the F&I office unless there’s a valid reason. Practices such as lowering rates to encourage product sales should be avoided (this can also lead to other compliance issues as well). If there is a legitimate reason to adjust a rate in F&I, there should be written documentation. Everyone in the dealership tasked with quoting payments should be trained on your desking policies and the same payment-quoting practices should be used in all departments, including internet, fleet, and special finance.

Train, monitor, and enforce compliance.  Many dealership employees are promoted to management positions based solely on their ability to sell cars, and are provided with little or no training. As a result, there is often a lack of loan underwriting knowledge at the desk & F&I level. Managers should have a high-level understanding of credit bureau interpretation, loan underwriting guidelines, and deal structuring in order to produce consistent, logical pencils and structures that are not potentially discriminatory. Traditional sales and F&I training typically don’t provide those forms of education and curriculum. An investment in comprehensive training will go a long way towards protecting the dealership. In addition, regular audits should be performed and all employees should be held accountable for strict adherence to company policies.

Of course, this entire discussion may be moot if the consumer advocates somehow get their way and are successful in outlawing dealer rate markups. Let’s hope that doesn’t happen, but if it does I’m sure the industry will overcome adversity as it always has and continue to prosper. That said, I believe the suggestions above are good business practices whether the current dealer compensation system remains the same or we move to flat fee- only compensation. Well-thought-out and consistent processes, transparency, and education are always recipes for success.

Finance Reserve – Should It Stay or Should It Go Now?

This is a guest post by Eric Andersen, the President of the College of Automotive Management. With the government's ongoing attack on dealership practices, dealers and their staff need to step up their game to remain competitive and protect themselves against legal pitfalls. Dealerships that employ highly-skilled professionals will certainly prosper despite any changes brought on by government regulations. In my opinion, the College of Automotive Management offers the absolute best-in-the-industry training and development for automotive professionals.

Finance Reserve – Should It Stay or Should It Go Now?

by Eric Andersen

Well stay of course! But unfortunately that’s likely not going to happen.

If there is one thing our country’s current administration has proven, it’s that they will regulate what they decide they want to regulate – and won’t stop until they do. If their new agency, the U.S. Consumer Financial Protection Bureau, is bent on putting the screws to auto dealers and their entrepreneurial spirit, they probably won’t stop building a case for a decision they have probably already made. Hence we will continue to see “breaking news” from this agency like the recent article dated March 28^th, 2013 entitled Auto Loans Prompt 1,585 Complaints to New U.S.Consumer Watchdog.

                                  

So what is to be done?

Well after the ranting and raving is over (and I’m done now), the only logical thing to do is create a list of solutions and get in front of the problem. Offense is a great defense. Instead of spending any more time worrying or debating, we can use the circumstances to focus on creating new opportunities to increase total profits per sale.

Step 1: Determine what is most important to your company (the dealership). 

Due to a landslide of factors including factory incentives, the world wide web, and consumer opinion transparency, CSI should become every dealer’s number one priority and objective – above all else. When you stop and consider it, reserve profits are the only profit source in a dealership that produces ZERO CSI benefits. Paying for a vehicle comes with benefits. Paying for F&I products, parts or service comes with benefits. But paying for finance reserve does absolutely nothing to promote higher CSI. In fact, if abused, it can do the opposite (which is the agency’s case, blown out of proportion).  If CSI is more important to the company than reserve profits, then the thought process to find other positive solutions to increase profits per sale despite the loss of reserve can be continued.

Step 2: Change your pay plans now.

If you have pay plans for F&I Managers, Sales Managers or Salespeople right now that give them more incentive to increase the reserve rate vs. sell more valuable products and services to the customer, change them now. Who is more valuable to you? The insurance agent providing you with your car insurance, or the insurance agent that provides you with your car insurance, homeowners policy, health plan, and life insurance? The more business customers do with your company, the more valuable your company is to them, and the more meaningful that relationship is, and the harder it is to break. Redirect pay plans to focus more on aftermarket and F&I product sales income than reserve income. Then if reserve does go away, you won’t have an exodus of people because they previously relied on reserve income too heavily.

Step 3: Develop aftermarket and F&I product sales skills – from top to bottom, and track it.

Salespeople and Desk Managers have a dramatic influence on F&I product penetration. Provide training on how introducing the benefits of F&I products early and often in the sales process benefits everyone. Then reward salespeople and desk managers for achieving higher aftermarket and F&I product penetrations and thereby offset any loss of reserve income with valuable, CSI building F&I product income. In the future, when customers have big problems, they can be solved when claims are paid and thereby solidify customer loyalty while creating more repeat business opportunities (to replace vehicles when totaled, lost, or damaged). Also provide F&I Managers with “continuous” F&I product training, AND F&I sales process training to maximize their abilities to achieve higher product penetrations as soon as possible. Track the aftermarket and F&I product penetration of everyone involved and publish the results frequently. That helps keep everyone’s eye on the ball!  

Step 4:  Develop loan underwriting expertise at the desk and F&I level

Programs like CUDL have become popular, despite paying lower reserve commissions than captives or banks, because they create additional profit opportunities for the dealer.  Having these programs and knowing how to use them makes the dealer more money. That’s due to their unique loan underwriting policies. Perhaps a deal can ONLY be made due to a lower rate, or better terms provided to a member of a credit  union that can’t otherwise be obtained at a traditional lender, even though the traditional lender offers a chance for more reserve profits. If desk managers or F&I managers don’t know about, or understand how to maximize those lending options the dealership is not competitive and will lose a lot more income than reserve profits. Make it a priority to ensure every desk manager and F&I manager becomes an expert at A&B Lending programs including local credit union options, leasing, special finance, and other loan underwriting  and deal structuring disciplines in order to ensure maximum total gross profits are obtained and no sales opportunities are missed.

Once a dealership implements solutions to achieve all four steps, the increase in total profits for the dealership now, and later, can dwarf whatever reserve income may be lost later if the current administration continues to get its way. And you can continue to triumph, due to your optimism and entrepreneurial, never-say-die spirit!

Welcome to the College of Automotive Management, the world’s premier automotive management and loan underwriting school. The heroes of our story are the thousands of graduates who have attended the College since 1992.  As they implemented their new knowledge and skills they created their own stories of success in the automotive and lending industries. Today, they are the owners, managers, leaders and influencers of the industry and helping to champion the positive changes towards higher profits through customer satisfaction and legal compliance. http://www.collegeofautomotive.com/

10 Things to Consider Before You Blow Off the Idea of Transparency

Dealers are constantly looking for ways to get an edge in the digital age, yet many continue to follow the same sales and advertising practices that they’ve been using for decades. The problem is that the game has changed and consumers have access to much more information and choices than ever before. In the past the dealer controlled all of the information, but today it’s just the opposite. Any information you offer is now carefully scrutinized and validated by a vast amount of online data. As a result, the likelihood of old-school sales practices backfiring has increased substantially.

So what type of “old-school” practices am I talking about? How about pricing vehicles without disclosing that there are rebates that most people don’t qualify for; trade-in values where the selling price is increased; trade under-allowances; withholding information on phone pops and internet leads (“just get ‘em in”); write-ups and F&I presentations (four-squares & payment packing); bait & switch advertising; and non-disclosure of vehicle histories and add-on fees?

I have spoken to many people who think this new-fangled transparency talk is just nonsense. After all, we’ve been doing business the same way for decades and it’s been wildly successful. If it ain’t broke we’d be stupid trying to fix it.

I get it. I’ll be the first to admit that I spent most of my career as a poster child for the “but we’ve always done it this way” mindset. My thinking has changed though. I’ve had the privilege of meeting some amazingly-smart automotive thought-leaders who have taught me that there’s more to success then the “whatever it takes to make a deal” mentality. While the business-as-usual way of thinking sure is comfortable, I’ve come to realize that it’s probably not the key to long-term success. So before you discount the idea of transparency in your dealership, you may want to consider these 10 potential benefits.

Increase Lead Conversion - The ultimate goal is still to “get ‘em in” and close the deal, but for an increasing number of shoppers, transparency is the only thing that will get them in. Not being upfront about details used to have its benefits. Up until recently, the salesperson could control the selling process because he or she controlled the information. Today, it’s just the opposite - consumers have all the information they need at their fingertips. If you resist answering customer’s questions, chances are you’ll never hear from them again.

Increase Closing Ratios - Higher levels of satisfaction with the selling process result in higher closing rates and higher sales. A recent survey by Maritz Research of over 163,000 Americans found that 64.0% are completely satisfied when one person with pricing authority negotiates a car deal vs. 20.7% when two or more with no pricing authority are involved.

Improve Your Reputation (your REAL reputation, not necessarily the one you “manage” online) - A dealership’s reputation is difficult, if not impossible, to maintain when staff members depend on “old school” practices. Customers often make decisions during a vehicle sale transaction that they come to regret after the “ether has worn off”. You can be sure they’re telling somebody about the transaction.  Or perhaps they’re telling thousands of people online?

Avoid Legal Problems - State & federal regulators frequently target “non-transparent” dealer practices as unfair and deceptive. These practices include bait and switch advertising, failure to sell at advertised prices, payment packing, vehicle history disclosures, yo-yo financing, improper fee disclosure, and misleading pricing.

But it ain’t illegal if you don’t get caught, right?

The new reality is that “getting “caught” is no longer likely to be just a fine and slap on the wrist. Regulators now have a new trick up their sleeve - using the media to humiliate those dealers caught in order to intimidate others. There’s plenty of political capital in going after car dealers for ambitious regulators. These regulators want press, and the tougher and more far-reaching the press the better. As a result, the severity of the offenses is often exaggerated (think about what the FTC did to those 5 unfortunate dealers last year). You need to ask yourself what the cost of that kind of negative publicity would be.

Increase Customer Satisfaction - Lack of transparency and old school tactics invariably diminish the customer experience. Nobody likes surprises. Sure, you made the deal but are your customers truly satisfied with your processes or do you just wear them down?

At the end of the day higher customer satisfaction translates into more repeat and referral business.

Increase Customer Loyalty - Customers only have loyalty if you earn it from them.

Transparent processes help build customer loyalty and retention. You’ll find that customers will be willing to spend more when they feel they’re buying from a business they can trust.

Your Customers Have Unprecedented Access to Information in Real Time - A recent JD Power report highlights a growing trend called 'Showrooming' where prospects sitting in your showroom are actually price competing your deal with another dealership using their mobile devices. Consumers not only have more access to information but also have access to more dealers. In the past, consumers were limited to dealers in their local area. The increase in the amount of information available to consumers has brought consumers a quick and easy way to analyze not only different prices via internet quotes but also to identify who they want to do business with. Customers simply have too many choices and will quickly discard dealers they feel are hiding something. Holding back information will only make them trust you less.

Reduce Chargebacks – What happens after the ether wears off and the customer goes home and reads the contract? I’ve found that the percentage of chargebacks and cancellations is directly related to transparency in sales and finance processes. For instance, staff members who participate in payment packing typically have a much higher chargeback rate. Once customers figure out that the “protection package” wasn’t really only a “few extra bucks a month”, they want to know why. You can only hope they don’t ask an attorney that question.

You’ll Stand Out From Your Competition – Let’s face it, there just aren’t a great number of dealers who are transparent yet. Progressive dealers can easily differentiate themselves by marketing their transparent processes and demonstrating their honesty. Consumers will respond - after all, how many consumers prefer old-school tactics?

Transparency is what consumers have been begging for so why not treat them the way they want to be treated? – Here’s a hint: it’s happens to be the right thing to do. In my opinion, subjecting customers to old-school processes doesn’t give them the respect they deserve. Just because you can doesn’t mean you should.

The good news is that transparency can be the pot of gold at the end of the rainbow. A transparent business model can greatly enhance your sales, reputation, customer retention, and bottom line. But first you must find the vision and courage it takes to break down deep-rooted stereotypes and embrace transparency.

I’ve said it before and I’ll say it again: Transparency is not a dirty word but complacency is. Do you have the vision and courage it takes to embrace transparency and go from being good to being great?