Saturday, December 28, 2013

Breaking Compliance News - December 2013

CFPB and DOJ Order Ally to Pay $80 Million to Consumers Harmed by Discriminatory Auto Loan Pricing
Ally to Pay Additional $18 Million in Civil Penalties for Harming More Than 235,000 Minority Borrowers
WASHINGTON, D.C. The Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ) today ordered Ally Financial Inc. and Ally Bank (Ally) to pay $80 million in damages to harmed African-American, Hispanic, and Asian and Pacific Islander borrowers and $18 million in penalties. The CFPB and DOJ determined that more than 235,000 minority borrowers paid higher interest rates for their auto loans between April 2011 and December 2013 because of Ally’s discriminatory pricing system. Today’s orders represent the federal government’s largest auto loan discrimination settlement in history. 

Car dealer accused of trying to get fraud witness — his uncle — killed

A suburban car dealer plotted to kill his uncle in a doomed attempt to beat a federal fraud case, prosecutors allege.

Sikh salesman settles suit against Lexus dealership

A car salesman, who is a member of the Sikh religion, has won a lawsuit against a Lexus dealership, where he had applied for work. The dealership had a policy that the prospective salesman said violated his religious beliefs. 

Lawsuit accuses some employees at 2 Charleston-area auto dealerships of using sham trade-ins to boost sales 

A newly filed lawsuit alleges that some employees at two Charleston area auto dealerships participated in a scheme to dupe low-income buyers into purchasing vehicles they couldn't afford.


Tuesday, November 26, 2013

Financing a Sale to Military Personnel Necessitates Extra Precautions by F&I Personnel

A financed automobile transaction is often mistakenly thought of as a contract between the customer and the lending source.  From a strict legal perspective, this is not true. A financed automobile purchase transaction is actually a two legal (but related) transactions. The first transaction is a contract of purchase that contains finance terms existing between the selling dealer and the buyer. Absent statutory waiting periods existing in some states, a finance contract for the purchase of a vehicle is a binding contract between the Dealer and the Buyer once fully consummated (i.e. executed contract  or in some states, executed contract plus vehicle delivery thus triggering the title transfer). The second legal transaction is created by the dealer’s successful assignment of its rights under the purchase contract to a lender. When selling or leasing a vehicle on financing terms to an active duty member of the armed forces, you or your lenders ability to enforce the financing terms of the contract may be minimized by federal law protections.

For active duty military customers, additional federal law protections exist in the form of the Servicemembers Civil Relief Act of 20031, (“SCRA”). This includes insulation from litigation and judgments, the ability to delay court actions, and what is known as the “6% Rule” for finance contracts for automobile and other consumer credit financing.

What is the 6% Rule?  

Quite simply, once a service member is called to active duty where their yearly earnings are reduced as a result thereof, the borrower has a legal right to a reduction in any consumer finance interest rate to no more than 6% beginning on the date active duty begins through one year after active duty is terminated. Once demanded, any interest amount in excess of 6% is forgiven by law.  The lender would have to adjust the interest rate for this borrower down to 6% and write-off the difference.  Application of this rule may cause the lender to charge back an assigned contract, especially if military status was not properly determined by the F&I representative and provided as part of the financing documents submitted at the time of contract assignment. 

Aside from the potential interest rate impact, enforcing a court judgment, especially one resulting from a customer not appearing in court (i.e. a default judgment), against an active duty member of the military is difficult, if not impossible, in some circumstances. At best it can be a long drawn out process.

Courts usually apply the SCRA to require that the plaintiff (usually a dealer or lender) provide a military affidavit (also called a non-military affidavit, SCRA Affidavit, Affidavit of Military Service, and many other iterations) to attest to whether the defendant is subject to the protections of the SCRA. 

Students of the College of Automotive Management are taught key compliance laws and how to ensure they do not violate them, including proper disclosures and forms needed to protect themselves and their dealership from both inadvertent mistakes as well as intentional legal compliance violations.  
1 The Servicemembers Civil Relief Act  of 2003; Public Law 108-189; 50 U.S.C. App. §§501–596 (19 Dec 2003);as amended by Public Law 108-    454 (10 Dec 2004.)

-- Submitted by Marc Bonanni, Esq. 11/26/13

Friday, November 15, 2013

Breaking Compliance News - November 2013

N.Y. Regulator Reaches $135K Settlement With Dealer 
NEW YORK — Attorney General Eric T. Schneiderman’s office reached a settlement yesterday with N.R. Automotive Inc.. The dealership, which was doing business as New Rochelle Toyota, will repay a total of $86,826 to 174 customers who were charged a bogus administrative fee.
Click Here to Read Full Story in F&I and Showroom Magazine

Dealer Settles With State
A New Jersey used-car dealer agreed to pay the state $66,000 in civil penalties and investigative and legal cost reimbursements to settle claims the store misrepresented vehicles.
Click Here to Read Full Story in Used Car News

Large Dealer Admits to Breaking Transaction Law
The largest volume used-car dealership in the state of Washington pleaded guilty and was sentenced for failure to file a monetary transaction report. 
Click Here to Read Full Story in Used Car News

Dealer Pays to Settle Religious Discrimination Lawsuit
Elk Grove car dealership has agreed to pay a former employee $158,000 and revise its personnel policy to settle a religious discrimination lawsuit.
Click Here to Read Full Story in The Sacramento Bee

Disparate Impact Challenge Ends in Settlement
WASHINGTON and MOUNT HOLLY, N.J. — On the eve of a public forum on auto lending, hosted by the Consumer Financial Protection Bureau at its Washington, D.C., headquarters, a town council in N.J. voted to settle a housing discrimination case that relied on a much-disputed legal theory called “disparate impact.” The Consumer Financial Protection Bureau (CFPB) is currently using the theory in its review of the indirect financing channel.
Click Here to Read Full Story in F&I and Showroom Magazine

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Sunday, May 19, 2013

Are Your Desking Practices Putting Your Dealership At Risk?

Despite NADA’s landmark victory in getting most auto dealers exempted from direct oversight by the Consumer Financial Protection Bureau (CFPB), it looks like the agency has found a back-door way to make life more difficult for dealerships. The Bureau recently announced that lenders that offer auto loans through dealerships will be held responsible for “unlawful, discriminatory pricing at the dealership level”. The Bureau has indicated that it sees a potential for discriminatory pricing caused by the policies of some indirect auto lenders that allow auto dealers to mark-up lender-established buy rates and that compensate dealers for those markups in the form of reserve. Their rationale is that because of the incentives these policies create, and the discretion they permit, there is a significant risk that they will result in pricing disparities on the basis of race, national origin, and potentially other prohibited bases. A central issue is that lenders traditionally leave it up to dealerships to set the final interest rate customers pay on their indirect auto loans arranged by dealerships. The CFPB guidance calls for additional compliance burdens on lenders who purchase Retail Installment Contracts from dealers and expects those lenders to take “remedial action” with dealers when necessary. As the old saying goes, “stuff” rolls downhill.

Here’s the problem: the CFPB is citing the concept of “disparate impact” - which is purely a statistical analysis - in evaluating potentially discriminatory dealer rate markups. Only the numbers matter, not the intent or even the knowledge of the creditor. So, even if a lender or dealer didn't intend to discriminate, they may still be held liable for perceived discrimination against protected classes. You can be doing everything completely neutral or unbiased but if there is a statistically significant adverse impact on a protected class, you can still be held responsible under the Equal Credit Opportunity Act (ECOA).

The CFPB further recommends that indirect auto lenders take steps to ensure that they are operating in compliance with fair lending laws as applied to dealer markup and compensation policies. These steps may include revising dealer markup policies, eliminating dealer discretion to markup buy rates, and compensating dealers using a different mechanism that does not result in discrimination, such as flat fees per transaction.

As a result of these announcements, at least one major bank has already sent a letter to dealers indicating that it will “periodically review dealer portfolios, addressing indications of potential discrimination”. The letter also stated in part “if you are unable to provide any explanation for the pricing differences, or if we continue to identify unexplained differences in your pricing to protected classes on a prohibited basis, we will consider taking further action”.

Who knows what these “actions” could include - perhaps disruptive audits or even demands for repurchase of a dealer’s entire portfolio?

While it remains to be seen whether this will ultimately affect how dealerships get compensated for arranging financing, it’s clear that the government intends to carefully scrutinize dealer loan-pricing practices.

Now that’s not to say that any of this makes sense. It certainly seems like a stretch that dealers are discriminating against consumers. But keep in mind that while it’s quite likely that allegations of pricing discrimination in connection with dealer participation are questionable at best, the potential liability is real and dealers should pay close attention. Consumer advocates have been pushing the idea that dealer participation is evil for quite some time and the government is obviously buying into it. Keep in mind that while the CFPB may not have direct jurisdiction over dealers, they have working partnerships with the DOJ, FTC. and state attorneys general and could refer matters to those agencies for action against the dealerships. As if that’s not bad enough, plaintiff’s attorneys will almost certainly be on the watch for potential claims of Unfair and Deceptive Acts and Practices (UDAP).

So if your bank, regulator, or an attorney sent you a letter, how would you respond? Following are suggestions on policies and processes that may help favorably position your dealership in the event of a fair lending inquiry.

Implement a desking and fair lending policy at your dealership that addresses how payments are quoted. Dealership personnel need to be careful that the processes they use to quote payments avoid any impression of discriminatory practices. The key is consistency.

·         If the dealership runs credit before presenting the first pencil, a good best practice can be to quote all payments initially with a standard (maximum) rate markup. So, for the first pencil, all customers will be quoted the buy rate for the tier they qualify for plus the established markup (e.g. two points) with variances only allowed for competitive and non-discriminatory purposes. If the rate is lowered in negotiations, the reason for the variance should be documented in writing (e.g. to match a rate offered by the customer’s credit union, or to bring the customer within budget, etc.). This way the dealership can show that their practices are consistent, fair, and non-discriminatory and justify why certain rates were higher than others even though the consumers were in the same tier. All exception notices should be kept in the deal jacket and care should be taken not to state the same reason on every deal where there is an exception made.

·         If the store doesn’t run credit before the first pencil quote, there can be a “store rate” that is used for all customers. This rate could be based on an average rate of sold deals over the last 90 days. Keep in mind that establishing an accurate store rate is difficult due to the wide range of credit tiers, so running credit before quoting rate is a safer fair lending practice. Another reason why pulling a credit report before quoting a payment reduces risk is that in doing so every quote will be based upon the actual credit-worthiness of the consumer. By “guessing” what rate the customer qualifies for, the possibility of making a mistake is greatly enhanced and it becomes more difficult to document a consistent, non-discriminatory process. In cases where you can’t pull credit before quoting a payment, a best-practice can be to inform those consumers that you are quoting a payment based upon their qualifying for “A” tier credit and that they may not qualify.  Any exceptions to quoting rate based on actual credit standing should be documented.

·         Always use a good faith effort in quoting the rate that you think the customer will qualify for. You shouldn’t rely on only the finance department to know rates and program guidelines; the desk needs to know as well.

Use full disclosure when quoting payments. Customers should be given all the necessary deal terms, including the selling price, trade allowance, payoff, down payment, rebates, the amount financed, payment, term and rate. This will also help eliminate the potential for payment packing or UDAP claims. Avoid using payment ranges, especially after credit has been run.

Make sure everyone is on the same page. If rates are quoted at the sales desk, that rate should not change in the F&I office unless there’s a valid reason. Practices such as lowering rates to encourage product sales should be avoided (this can also lead to other compliance issues as well). If there is a legitimate reason to adjust a rate in F&I, there should be written documentation. Everyone in the dealership tasked with quoting payments should be trained on your desking policies and the same payment-quoting practices should be used in all departments, including internet, fleet, and special finance.

Train, monitor, and enforce compliance.  Many dealership employees are promoted to management positions based solely on their ability to sell cars, and are provided with little or no training. As a result, there is often a lack of loan underwriting knowledge at the desk & F&I level. Managers should have a high-level understanding of credit bureau interpretation, loan underwriting guidelines, and deal structuring in order to produce consistent, logical pencils and structures that are not potentially discriminatory. Traditional sales and F&I training typically don’t provide those forms of education and curriculum. An investment in comprehensive training will go a long way towards protecting the dealership. In addition, regular audits should be performed and all employees should be held accountable for strict adherence to company policies.

Of course, this entire discussion may be moot if the consumer advocates somehow get their way and are successful in outlawing dealer rate markups. Let’s hope that doesn’t happen, but if it does I’m sure the industry will overcome adversity as it always has and continue to prosper. That said, I believe the suggestions above are good business practices whether the current dealer compensation system remains the same or we move to flat fee- only compensation. Well-thought-out and consistent processes, transparency, and education are always recipes for success.

Saturday, March 30, 2013

Finance Reserve – Should It Stay or Should It Go Now?

This is a guest post by Eric Andersen, the President of the College of Automotive Management. With the government's ongoing attack on dealership practices, dealers and their staff need to step up their game to remain competitive and protect themselves against legal pitfalls. Dealerships that employ highly-skilled professionals will certainly prosper despite any changes brought on by government regulations. In my opinion, the College of Automotive Management offers the absolute best-in-the-industry training and development for automotive professionals.

Finance Reserve – Should It Stay or Should It Go Now?
by Eric Andersen

Well stay of course! But unfortunately that’s likely not going to happen.

If there is one thing our country’s current administration has proven, it’s that they will regulate what they decide they want to regulate – and won’t stop until they do. If their new agency, the U.S. Consumer Financial Protection Bureau, is bent on putting the screws to auto dealers and their entrepreneurial spirit, they probably won’t stop building a case for a decision they have probably already made. Hence we will continue to see “breaking news” from this agency like the recent article dated March 28th, 2013 entitled Auto Loans Prompt 1,585 Complaints to New U.S.Consumer Watchdog.

So what is to be done?

Well after the ranting and raving is over (and I’m done now), the only logical thing to do is create a list of solutions and get in front of the problem. Offense is a great defense. Instead of spending any more time worrying or debating, we can use the circumstances to focus on creating new opportunities to increase total profits per sale.

Step 1: Determine what is most important to your company (the dealership). 

Due to a landslide of factors including factory incentives, the world wide web, and consumer opinion transparency, CSI should become every dealer’s number one priority and objective – above all else. When you stop and consider it, reserve profits are the only profit source in a dealership that produces ZERO CSI benefits. Paying for a vehicle comes with benefits. Paying for F&I products, parts or service comes with benefits. But paying for finance reserve does absolutely nothing to promote higher CSI. In fact, if abused, it can do the opposite (which is the agency’s case, blown out of proportion).  If CSI is more important to the company than reserve profits, then the thought process to find other positive solutions to increase profits per sale despite the loss of reserve can be continued.

Step 2: Change your pay plans now.

If you have pay plans for F&I Managers, Sales Managers or Salespeople right now that give them more incentive to increase the reserve rate vs. sell more valuable products and services to the customer, change them now. Who is more valuable to you? The insurance agent providing you with your car insurance, or the insurance agent that provides you with your car insurance, homeowners policy, health plan, and life insurance? The more business customers do with your company, the more valuable your company is to them, and the more meaningful that relationship is, and the harder it is to break. Redirect pay plans to focus more on aftermarket and F&I product sales income than reserve income. Then if reserve does go away, you won’t have an exodus of people because they previously relied on reserve income too heavily.

Step 3: Develop aftermarket and F&I product sales skills – from top to bottom, and track it.

Salespeople and Desk Managers have a dramatic influence on F&I product penetration. Provide training on how introducing the benefits of F&I products early and often in the sales process benefits everyone. Then reward salespeople and desk managers for achieving higher aftermarket and F&I product penetrations and thereby offset any loss of reserve income with valuable, CSI building F&I product income. In the future, when customers have big problems, they can be solved when claims are paid and thereby solidify customer loyalty while creating more repeat business opportunities (to replace vehicles when totaled, lost, or damaged). Also provide F&I Managers with “continuous” F&I product training, AND F&I sales process training to maximize their abilities to achieve higher product penetrations as soon as possible. Track the aftermarket and F&I product penetration of everyone involved and publish the results frequently. That helps keep everyone’s eye on the ball!  

Step 4:  Develop loan underwriting expertise at the desk and F&I level

Programs like CUDL have become popular, despite paying lower reserve commissions than captives or banks, because they create additional profit opportunities for the dealer.  Having these programs and knowing how to use them makes the dealer more money. That’s due to their unique loan underwriting policies. Perhaps a deal can ONLY be made due to a lower rate, or better terms provided to a member of a credit  union that can’t otherwise be obtained at a traditional lender, even though the traditional lender offers a chance for more reserve profits. If desk managers or F&I managers don’t know about, or understand how to maximize those lending options the dealership is not competitive and will lose a lot more income than reserve profits. Make it a priority to ensure every desk manager and F&I manager becomes an expert at A&B Lending programs including local credit union options, leasing, special finance, and other loan underwriting  and deal structuring disciplines in order to ensure maximum total gross profits are obtained and no sales opportunities are missed.

Once a dealership implements solutions to achieve all four steps, the increase in total profits for the dealership now, and later, can dwarf whatever reserve income may be lost later if the current administration continues to get its way. And you can continue to triumph, due to your optimism and entrepreneurial, never-say-die spirit!

Welcome to the College of Automotive Management, the world’s premier automotive management and loan underwriting school. The heroes of our story are the thousands of graduates who have attended the College since 1992.  As they implemented their new knowledge and skills they created their own stories of success in the automotive and lending industries. Today, they are the owners, managers, leaders and influencers of the industry and helping to champion the positive changes towards higher profits through customer satisfaction and legal compliance.