June 15, 2021

Federal agencies plan increased oversight of F&I

U.S. auto dealerships seeing a profit surge as a result of supply constraints aren’t the only ones having a good year. Another group in automotive retail having a landmark 2021 is compliance experts.

Incoming leadership at the Consumer Financial Protection Bureau and the Federal Trade Commission — the primary federal agencies that oversee auto lending and retail operations — have been outspoken about curtailing abusive practices at the dealership level in two main profit-driving business activities: sales of finance-and-insurance products and dealership reserve.

Increased activity from the federal level is partially why Mosaic Compliance Services, based in Tampa, Fla., is expected to triple its business this year, according to CEO Jim Ganther.

Fears that the federal agencies with the most impact on dealership compliance will return to an Obama-era activist level of scrutiny are prompting dealers to flock to his agency for assistance, he said.

“This is something our current administration is broadcasting. They intend to pick up the torch from Obama and reshape how commerce is conducted, even in the absence of actual harm,” Ganther said.

“We haven’t been this busy at Mosaic since the CFPB came into being” in 2011.

Though self-serving, compliance experts warn the risk to dealerships is real.

Under President Joe Biden, stores are bracing for strengthened oversight of the F&I office.

To understand the direction both federal agencies are likely to take, retailers should look no further than the statements outlined in the FTC’s case against New York dealership Bronx Honda last year, according to dealership compliance consultant Randy Henrick.

“They are very into disparate-impact credit discrimination … if [that] is an unfair trade practice, the same would be the case with disparate-impact pricing in aftermarket products,” he said. “They don’t like dealer markups.”

Though compliance standards in auto retail remain strict, regulator activities meant to curtail bad behavior slowed to a trickle during President Donald Trump’s administration.

After Obama-appointed CFPB Director Richard Cordray stepped down in 2016, he was replaced by Mick Mulvaney, who had once described the agency as a “sick, sad” joke. As interim director, Mulvaney focused on reorganizing the agency’s acronym and debating the merits of maintaining a consumer complaint database. He was replaced by Kathy Kraininger, who assured auto industry leaders that the bureau would act through education rather than enforcement to protect consumers.

This proved true: Over the past four years, the bureau has generated about $2.3 billion in consumer relief through enforcement actions, Bloomberg reported, compared with more than $10 billion during the Obama administration’s second term. Some of the $2.3 billion in payouts from 2016 to 2020 were the result of previous investigations, rather than action the bureau undertook during the Trump administration.

Comparatively, Biden’s appointees to lead the two agencies are outspoken about scrutinizing practices in the F&I office.

Last May, the FTC filed a complaint in a U.S. District Court in New York accusing a dealership of overt discrimination against African American and Hispanic vehicle buyers — alongside a slew of other illegal activities. The FTC alleged the defendants violated the Fair Trade Commission Act, the Truth in Lending Act and the Equal Credit Opportunity Act, the agency said in a statement.

The Dodd-Frank Act of 2010 allows the CFPB to oversee independent and buy-here, pay-here dealerships, but not franchised stores.

It would take an act of Congress for the CFPB to assume jurisdiction over franchised auto dealerships, Henrick said, “because it was an act of Congress [that was used] to exclude them in the first place.”

For now, the FTC has the power to investigate and possibly use its authority to impose additional rules over automotive sales practices. F&I product sales and dealership reserve income were openly criticized by two FTC commissioners in the Bronx Honda case.

In her comments about the “tricks and traps” leveraged by Bronx Honda, acting FTC Commissioner Rebecca Slaughter said the practices levied against consumers are “all too prevalent at auto dealerships across the country.”

“The complaint against, and settlement with, Bronx Honda and its general manager, Carlo Fittanto, highlight the perils that consumers, especially people of color, face in purchasing and financing a vehicle, and they illustrate the limited utility of one-off enforcement actions to fix a broken market,” she said.

Slaughter’s call for “far-reaching structural reform” in the auto finance and sales markets is echoed in her colleagues’ comments on the same case.

Rohit Chopra, Biden’s pick to lead the CFPB, called dealer reserve “an undisclosed kickback that dealers earn for convincing prospective car buyers to agree to a higher interest rate than they actually qualify for with a lender.”

Dealers are particularly wary of Chopra, who made clear during the Bronx Honda case that he thinks more should be done to regulate auto lending, said Marv Eleazer, finance and insurance manager at Langdale Ford Co. in Valdosta, Ga. Though he is not a legal expert, Eleazer is the founder and a moderator of the Ethical F&I Facebook group, which counts more than 10,000 dealership finance managers, dealer principals and other industry figures as members.

“Even though the bureau doesn’t have oversight of franchised dealerships, that could be solved with a pen stroke from Biden,” Eleazer told Automotive News.

“Will the dealer community ever be free from worry? Not until a zero-tolerance policy is implemented.”

Bronx Honda charged “certification fees” of up to $1,995 for the warranty coverage already included with American Honda certified pre-owned vehicles.

Payment packing is a top area of concern in the F&I office in terms of compliance, wherein a dealership finance manager inflates vehicle costs to obscure additional products the consumer did not consent to purchase.

The value of the F&I products, and what dealerships are charging for them, also are problems, according to Patty Covington, a partner at Hudson Cook.

“Some products, they say, are really not worth the paper they’re written on,” she said.

Using terminology such as “voluntary protection products” is part of the industry campaign to improve the perception of finance office activities.

The American Financial Services Association published a white paper during the pandemic that highlights the advantages of “optional protection products,” and cited a 2017 study suggesting that consumers were fully informed of debt protection products and their option to refuse them at the point of sale.

Dealership reserve, or dealership participation, has undergone a similar public relations cleansing. In 2013, the CFPB leveraged anti-discrimination laws in an attempt to force auto lenders to limit or eliminate dealer reserve. After a spate of consent orders and sweeping changes from some of the nation’s largest auto lenders, Trump clipped this power in 2018.

Still, the dealership community is eager to disassociate dealership reserve with the idea of an undisclosed kickback. The National Automobile Dealers Association disseminated advice for how dealerships can approach reserve after the Department of Justice determined in 2007 that a dealership, Pacifico Ford, violated the Equal Credit Opportunity Act through its dealership reserve program.

Rescinding the guidance likely prevented further consent-order activity that occurred with major auto lenders in the early years of the CFPB, Covington said. Still, concerns over disparate impact remain a consideration for regulating installment contracts.

“The dealer participation issue has never gone away completely,” she said. “I don’t think that’s what the CFPB will focus on, but the FTC may seize on the issue with respect to dealers.”

Because disparate impact remains an unfair, deceptive act or practice under the FTC’s description “means it’s still very much out there” as a reason the agency can use to investigate a dealership, Henrick said.

Dealership experts have long advised establishing a set interest rate markup for dealership participation.

NADA’s program outlines possible reasons retailers can give if they are required to explain why they deviated from their established dealership reserve amount.

Still, concerns that dealership reserve leads to minority and female customers paying more for auto loans than white male customers in similar financial situations is a concern among federal regulators.

Dealership leaders have learned from cases such as those of Bronx Honda and Gunderson Chevrolet, Eleazer said.

The Los Angeles-area Gunderson, owned by AutoNation Inc., once was one of the largest Chevy stores in the country. In 2002, the California Department of Motor Vehicles charged Gunderson with fraud, deceit and misrepresentation to more than 1,500 customers in the first case in which dealership employees were criminally prosecuted for tactics common in the industry.

In Eleazer’s opinion, dealerships introduce liability by failing to address customer complaints.

“The thing some dealers forget is the law usually sides with the customer,” he said. “Sometimes, unwinding is better than irritating a customer and eventually writing a settlement check.”