The Consumer Financial Protection Bureau is sending signals it may be interested in scrutinizing the value of F&I products purchased by consumers, relative to the cost of the products for dealers, according to David Bafumo, president of FNI Inc. in Cary, N.C., a firm that consults with auto lenders and dealerships.
Fixed prices for F&I products may be the end result for dealership groups that don’t already employ fixed prices, Bafumo said.
He said the CFPB’s consent order last month with Synchrony Bank, formerly GE Capital Retail Bank, in the credit card market has clear implications for lenders and dealerships that handle the sale of F&I products, especially those that cost dealerships little compared with what they sell them for.
It’s also possible the CFPB could apply the disparate-impact theory to add-on products, Bafumo said, and look for legally protected groups paying higher prices, as the bureau already is doing with indirect auto loans and dealer reserve.
A CFPB consent order with U.S. Bank and Dealers’ Financial Services in June 2013 over a program called Military Installment Loans and Educational Services, or MILES, addressed the marketing and advertising of automotive F&I products, but not the value of the products themselves.
Bafumo discussed the GE Capital case and its ramifications for F&I product sales by phone recently with Automotive News Special Correspondent Jim Henry.
What’s different about the GE Capital order, as opposed to the MILES consent order in 2013?
There are a couple of things about it. Disparate impact didn’t come up at all back then. The other piece of news for the product business is that they [the CFPB] really didn’t bother [U.S. Bank and Dealers’ Financial Services] about the profit, about the markup of the product. Part of that was that MILES, or I guess DFS, were pretty modest, relatively speaking, in terms of selling GAP for $500, and not for $999 or $899 or $799, and service contracts weren’t marked up like what you would see normally at a dealership.
(Note: According to the CFPB, MILES customers paid a range of $1,100 to $4,000 for extended service contracts; the average was $2,600, with interest. The CFPB said the average for GAP was $495 cash price or less in some states where GAP prices are capped by law. The $495 cash price is about $750 with interest, the CFPB said.)
How do regulators measure the customer benefits of a product that works like insurance? Do they measure how much actually gets paid out against how much money comes in?
There could be data for that very easily. That data would certainly be available. But to measure what’s the average claim rate on whatever product versus the retail price, I don’t think the regulators want to go there. To me, it’s a lot simpler: What is the transparency of the products? What are the benefits to the customer? What that gets at is product value. There’s a lot of easier ways to determine that than having to run some statistical analysis.
Customer complaints are a big area the CFPB is interested in. That’s something banks are going to get involved with and that dealers are going to need to get in front of: “We sold 700 of these products and we had 35 customers come through the service department and say they were satisfied,” or something like that.
Is the CFPB more likely to go after big-ticket items such as service contracts, in which there’s a big customer outlay but potentially a big payout? Or will it target smaller items, in which the cost isn’t so big but maybe the payoffs are small?
I think it’s a lot easier to go after the small ones. The big-dollar items have big attraction, and that’s where you’d think the eyeballs are going to go. But I’ve never been a big believer in products with very little value to the customer. I mean the kind of product that costs the dealer a few dollars and they retail it for $495. I hate to single one out, but pick one -- key protection, tire-and-wheel, windshield protection. Tire-and-wheel is a great example. It costs the dealer under $100 and they retail it for $500 or $600. Who benefits? Luxury cars, I get that. For luxury cars, that is a very expensive risk. But for somebody buying a Ford Taurus, I don’t know.
What about warranties on additives -- miracle substances that when added to the engine supposedly protect the whole car?
Implicit in this whole discussion is that if a customer gets all the correct, accurate information, we believe the customer can make an informed judgment. In some cases, you just know that if they were told properly what this product does for you, they would not buy it. If somebody understood that this is covered and that is not covered, they would not buy it.
Are there some F&I products that lenders just won’t finance? And how would they enforce it? Would they lower the advance, the amount they’re willing to lend?
I think you might see that pop up, especially on the subprime side. Right now, you’re right, it does get controlled by the advance. “We’re going to give you an indirect $2,500 on the back end.” I think you’re going to see some traction on [limiting] that.
The bigger issue is standardized product pricing. The notion of pricing customer by customer -- I don’t think that’s going to last.
On account of the CFPB’s arrival on the scene and guidance and enforcements over the last couple years, it has long been my opinion that finance companies are going to have to become more involved in regulating product sales at dealerships.
What can dealerships do?
Everybody looks at sales penetration and their profit margins, and that’s it. They need to start looking at products in terms of consumer performance. What does this thing actually do for anybody?
Dealers that work to protect their lenders from consumer complaints about products and consumer protection issues around F&I product sales will be rewarded with lasting relationships, and those who do not put their continuing access to consumer financing options at serious risk.