Disparate impact and dealer participation continue to be at the forefront of the CFPB agenda, and a hot topic for dealers, finance companies, and those in compliance. Overlooked by most in the industry is the Consumer Financial Protection Bureau’s interest in the marketing and sale of F&I products. The agency’s interest includes service contracts, GAP, and numerous other products sold in dealership F&I offices. The CFPB took action against U.S. Bank and Dealers’ Financial Services for questionable sale techniques and disclosures in the sale of service contracts and GAP.
A year ago at the 2013 American Financial Services Association Independents Conference, Richard Cordray, the Director of the CFPB, spoke quite a bit about “Add-on Products” (the CFPB’s terminology for the type of products sold out of most F&I offices). Mr. Cordray stated that “Add-on Products” sold to consumers must provide a value to the consumer reasonably related to the cost of the product.
One year later, and a day after Bank of America agreed to pay approximately $778 million for its sale of “Add-on Products”, the discussion at the 2014 American Financial Services Association Independents Conference was on ancillary products and their sale to consumers as part of the finance transaction. Similarly, at the 19th Annual Consumer Financial Services Institute held in April in Chicago, industry experts noted three things about ancillary products:
- Products ancillary to the financing transaction, “Add-on Products”, are a substantive priority of the CFPB.
- The CFPB expects the consumer to understand the product they are being sold and the value they expect from the product.
- There are rumblings from the CFPB that dealer discretionary pricing of F&I products, don’t be surprised, are fertile ground for disparate impact claims.
The following are CFPB “Add-on Product” actions over the last year:
- American Express: $85 million to consumers and a $14.1 million civil penalty
- Discover Bank: $200 million to consumers and a $14 million civil penalty
- Capital One: $140 million to consumers and a $25 million civil penalty
- Bank of America: $727million to consumers and a $20 million civil penalty
- JP Morgan Chase: $309 million to consumers and a $20 million civil penalty
Each of the above penalties and orders to pay consumers were based upon the CFPB’s determination that the sale of “Add-on Products” by each of the entities constituted an Unfair, Deceptive, or Abusive Act or Practice (UDAAP).
In Dealers’ Financial Services and U.S. Bank, the CFPB addressed the way service contracts and GAP were marketed and sold. Using its weapon of choice, UDAAP, the CFPB found the sale of service contracts were deceptive and abusive, as items not covered under the service contract were not as prominently displayed as the eye-catching selling points.
Although the service contract fully disclosed what was and was not covered by purchasing it, the latter was relegated to the small print. Small print is not a disclosure maker where the CFPB is concerned.
The CFPB also took issue with statements concerning the cost of both service contracts and GAP. Purchasers of vehicle service contracts were told the cost would add just a few dollars to the monthly payment, while GAP purchasers were told the additional cost would be pennies a month. The CFPB did the calculations and found that on a five-year loan, the average monthly cost for a vehicle service contract was $40, while the average monthly cost for GAP was $12.55.
Given the CFPB’s interest in F&I products, you may wish to look at what your dealership offers in F&I, and answer the following questions:
- Are there sale and marketing materials for each product offered in the dealership and have these materials been reviewed?
- Are the sale and marketing materials for each product accurate, contain proper disclosures, and do the materials accurately depict what is and what is not covered?
- Does the product provide a benefit to the consumer commensurate with the price being charged?
- Is the benefit provided to the consumer by the product reasonable with respect to the cost of the product?
- Does your dealership have established prices for each of the F&I products being offered?
- Are all customers treated equally on the sale of ancillary products and the cost they are being charged for said product?
- Are employees paid a commission based upon the price they obtain for an ancillary product, and if so does the dealership monitor the sale of these products to ensure that employees are not taking advantage of certain individuals and classes?
- Does your F&I Department use a menu to sell ancillary products?
- Does the menu clearly describe the product, its cash cost, and the financed cost?
The CFPB sees the sale of F&I products by automobile dealers as fertile ground to bring disparate impact claims. The CFPB view is that whenever a financial product is sold to an individual by a person who is paid a commission based upon the sale price of the product, there is significant potential for disparate impact discrimination to occur.
Therefore, much like the programs that have been instituted with regard to dealer markup, your dealership may want to consider strongly a similar program for ancillary products. Such a program would cover how each product sold is offered to each and every customer at the exact same price, and any variations from that price are duly documented, noted, and are based upon a legitimate business purpose or need.
Given the CFPB’s view of “Add-on Products”, it is only a matter of time before they turn further attention to the sale of F&I products. As with indirect auto lending, the CFPB’s scrutiny will not be directed at the dealership, but on financing sources over which the CFPB determines it has jurisdiction.
Therefore, to protect the manner in which the majority of dealerships have become accustomed to doing business, a model that has worked quite well without the assistance of the government, dealerships will need to institute compliance practices and procedures, together with training for the sale of F&I products. The CFPB has no direct control over your dealership, but they sure do over the entities that fund your sales. To finance sources, your dealership compliance program matters very much.