Want to stay ahead of federal and state regulators? First, adopt price caps for dealer reserve and F&I products, then document any deviation from the caps.
That was the takeaway from speakers last week during the Automotive News Access F&I webinar "F&I Trends to Watch in 2014." (For a replay, go to autonews.com/accessfijan2014.)
"Charging whatever the market will bear for F&I products is really becoming increasingly dangerous," said Jim Radogna, director of compliance for the College of Automotive Management in Santa Ana, Calif.
The Consumer Financial Protection Bureau is leaning on lenders to eliminate the dealer reserve, a compensation method in which dealerships add a small amount of interest to the lender's buy rate on a consumer auto loan.
The CFPB says dealer discretion in setting dealer reserve can result in discrimination in the form of higher rates for minority borrowers. The CFPB has suggested flat fees or a flat percentage of the amount financed as alternative compensation methods.
Instead of ditching the dealer reserve, though, some experts say dealerships should adopt a price cap on dealer reserve and document a justifiable business reason any time a discount is allowed. That approach mimics a 2007 consent order in which Philadelphia-area dealerships settled discrimination charges brought by the U.S. Department of Justice.
The CFPB hasn't addressed discrimination in pricing on F&I products, such as extended-service contracts or GAP. But some experts expect that to happen in 2014.
Paul McCarthy, executive general manager for Stevenson Automotive Group in Jacksonville, N.C., said during the webinar that dealership employees need to be trained to take a consistent approach to pricing throughout the dealership. That includes both F&I managers and salespeople, he said.
"A big focus for 2014 should be to have consistent practices in the calculation of both interest rates and product premiums, using a percentage or a dollar amount. Deviation from the standard presentation should be documented so that a consistent approach in these areas can be shown," he said.
Radogna said anyone in the dealership who quotes prices to customers needs to be trained on the relevant legal issues, and everyone needs to quote prices the same way. "The key is consistency," he said.