Shortly before the Dodd-Frank Act was passed in July of 2010, NADA was strongly lobbying in Washington, DC to keep franchise auto dealers out of the purview of the Consumer Financial Protection Bureau (CFPB). By the time the bill cleared, committees were ballyhooing that they had succeeded and that franchise dealers (and some select independent dealers) would not fall under their regulations.
Although they may have succeeded in the fact that they are not being directly regulated by the CFPB, the banks and auto finance companies that serve the industries are.
The CFPB and You
How does this impact you? You signed agreements with these institutions requiring you to conduct your business properly and you represented and guaranteed to the institution your performance, usually to the extent of repurchasing defective contracts. Dealers need to be cognizant of potential claims of Unfair and Deceptive Acts and Practices and enact procedures that foster full disclosure.
Recently, one of our clients sent me a letter that they had received from CPS. It stated that they monitor “… our entire loan portfolio and also each of our active dealer’s loan portfolios to ensure compliance with applicable state and federal fair lending laws.” It went on to state, “… your dealership shows signs of variable buy rate mark up. This simply means you are not marking up the buy rate on contracts sold to CPS is a consistent manner. Unfortunately, variable buy rate markup can also be interpreted as non-uniform treatment of protected classes as defined by the ECOA (Equal Credit Opportunity Act).”
Certainly, in this case, CPS, like most banks and finance companies, have had their dance with the CFPB. They simply are reacting to compliance edicts given to them. This, however, is not a CPS problem; it is a dealer problem, unfortunately. In this case, the dealer did not lose the use of CPS, however, they did lose the ability to earn finance reserve on all deals for a minimum of six months, which if they were doing just five deals per month could easily equate to over $20,000 in gross profit.
What Should You Do?
What is a dealer to do? There are many compliance guidelines for rate markup in existence. NADA has one that I recommend reviewing. The bottom line is that you must be quoting the same finance rate for either all customers at first pencil (such as the average rate of all contracts for the past quarter) or, have a set markup for all customers within a certain credit tier.
This is something dealers must be proactive on. First, you must find a plan and put it in place in your store, if you haven’t. The other thing dealers or executive managers should do is personally maintain a strong relationship with your finance sources. In this situation, there had had been long-term telltale signs of trouble, but the dealer was unaware. All in all, for this dealer they were lucky this is all that happened, as it could have been much, much worse.