Originally published in March 2021.
Regulatory Reboot
JG: Hello and welcome to Drop the Bow Tie. I'm Jim Ganther and today we'll be talking about F&I best practices under a Biden Administration. With me today to discuss this stimulating topic is Gil Van Over III, the founder, and president of GVO3 and Associates, probably the premier F&I audit function in the country.
GVO: We like to think so
JG: And the executive director of Automotive Compliance Education or ACE, the certification outfit based out of suburban Chicago.
GVO: Based out of suburban Chicago.
JG: Gill we've got a new administration in Washington D.C. Dealers seem to be concerned about what might be coming down the pike. What do you think the biggest compliance challenges will be for dealers under a Biden Administration?
GVO: This is not a question that's never come up in the last couple of months. I'm hearing it constantly. I've addressed a couple of groups with that very topic and the risk—or what they perceive to be the risk—is a regulatory reboot.
JG: What do you mean by a regulatory reboot?
GVO: Well during the Trump Administration, there was a perceived lack of regulatory over-compliance by some of the federal agencies. Now it's not true of all of them. The Federal Trade Commission continued to go after the bad actors, but the CFPB (the Consumer Financial Protection Bureau) really kind of pulled back a little bit. They rescinded the requirement for us to try to keep track of why we wrote certain deals at a certain markup over buy rate and we had to document the differences. That got rescinded. That's an example. The perception is—and I think is well-founded—is that with a new commissioner in charge of the FTC and a new director of the CFPB, they've stated on the record that they don't like dealer reserve and they intend to come after it. So that is driving a lot of fear into the dealer world as to what's going on.
JG: Late in the Obama Administration the CFPB began to look much more closely at dealership pricing with respect to F&I products. That initiative came to a grinding halt with the Trump Administration. With a new sheriff in town do you think that specifically will be revisited?
GVO: That certainly is the rumor. Now we don't even call them F&I Products anymore. In anticipation of that, we call them Voluntary Protection Products or VPP. The idea is that these products have value to the consumers. There's always going to be something that goes wrong with the vehicle during the purchase cycle—in the financing cycle. Consumers need protection against those types of incidents happening. So they have value and I think the issue that the regulators—if I were a regulator this is what I would look at:
Are you making a fair profit or are you gouging people?
Are you pricing those products higher to consumers that are protected under the equal credit opportunity act or protected classes? In other words, are you discriminating in your pricing?
With those two topics in mind, I think that's where they might be going when looking at the products. What they'll do with it, anybody's guess.
JG: And everybody is guessing.
GVO: Right.
Self-Regulate
JG: But assuming that it is a given that there will be more regulatory oversight rather than less, what would you suggest a dealer do as a best practice to put their ship in order—such that if a CFPB investigator or a plaintiff's attorney came knocking on the door—what would you want the deal jacket to look like? What can a dealer do proactively?
GVO: From a Voluntary Protection Product pricing perspective a dealer has to self-regulate. If you're in Florida, most of your products have filed rates. That's not regulated by the state but you have to file rates with the state as to what you're selling it for. Service contract for example—you can't discount it. You can't charge more for it than your filed rate. Florida is one of the few states that does that. For all dealers that aren't in a state where you're required to file your rates, you should file them yourself and call them your dealer law rates and leave it at that. So I've got industry standards from working with over a thousand clients and doing litigation support. I have a good idea as to what the market would charge as a fair profit.
JG: Well then let's drive off “fair profit.” How would you advise a dealer to price vehicle service contracts and let's say domestics, not luxuries? I'm going in to buy a Chevy Equinox. What would you suggest that Chevy dealer price—under its own self-regulatory scheme —how would you suggest they price the VSC?
GVO: I would start with, first of all, you have a cost. So I like to set up our rate schedules with our clients based on a cost and make it a profit margin over the cost because if you try to set your pricing by retail pricing, every time your price changes you got to change your guide. You know, your policy and you don't want to have to get into that situation because you won't do it. You won't do it. So you start with the cost to F&I and that includes the pack. So let's say that the cost is a thousand dollars. For any dealership that we set up, we say, over that thousand dollars you can make a maximum of fifteen hundred to two thousand dollars profit on that deal, depending on how aggressive you want to get. Fifteen hundred is conservative. Two thousand is highly aggressive. But there are some dealers at that number. So that goes back to industry standards.
JG: And it would also be capped by finance source limits? You know, if the lenders are going to have caps on certain products?
GVO: They do, but you know, for example, one of them will say, okay we'll finance a service contract up to $2,500. But they don't know what the cost is. So you could sell a $200 service contract for $2,500 and that, I believe, would be over my limits. That really is more of a transactional—what will we finance—scenario, as opposed to trying to be a valid arbiter of what your pricing should be.
JG: Would your pricing guidelines differ between VSCs and say GAP and ancillary?
GVO: Yes.
JG: How so?
GAP
GVO: GAP is where I would go to either a finance source limit. Ally, for example, will allow you to go $1,500 retail price. Some of the credit unions in Tampa will limit you to $800. Some dealers are one price. Colorado has state-mandated pricing on what you can sell it for. Texas does if you sell it as an insurance product and not a waiver. So it depends on where you're at, but we try to write the policy manual so that it says, 'finance source limits' or 'state guidelines.'
JG: And that's for GAP?
GVO: For GAP.
Ancillary Products
JG: What about ancillary products? Paintless dent repair, tire, and wheel, key replacement?
GVO: Those we go back to what's your cost to F&I and then your profit margin over and above that. We go with a range of $500 to $600 per product.
JG: Okay. That sounds like there's still plenty of profit capacity in that guideline provided you don't exceed them. Can you say anything about the importance of consistency to the internal self-regulatory guidelines?
GVO: Well if I were a regulator, and I'm not thank God.
JG: That's why you're here.
GVO: I don't work for the dark side ever—the Federales, but if I were a regulator, the first thing I would ask is, 'okay, let me see what is your pricing guidelines,' and if you say, 'I don't have one,' I know I got a big fish. If you do have one now I want to vet it. I want to say, 'are you living up to these guidelines?' Now, I'm not saying that you should have to one-price. It would make it easier if you did, but if you don't want to one-price just make sure you don't exceed the maximum because anytime that you exceed the maximum you know you're really rewriting your policy, and now [the question becomes] 'why did you exceed the maximum on this one?' Is it because they were part of a protected class and you thought that you could?
JG: In conclusion, are there any other best practices you would advise your dealer clients right now before the new regulatory scheme really gets traction? What would you tell them?
Compliance Management System
GVO: I will say this, there are some bad actors in our business and the FTC took a couple of them out last year. In the last couple of years. The dealers that we work with are good people they want to make a living, they want to make a fair profit, they want to take care of their community, they want to take care of their consumers, [and] they want to take care of their employees. They're good people. If you've been paying attention at all up until this point even before the Trump Administration came in, you've got the bits and pieces of a Compliance Management System in place. If the CFPB or the FTC came walking into your store with a complaint and you could show that you have a documented Compliance Management System—a robust one that is still operating today—then that's your best start of a defense.
JG: Okay. I thank you very much for your insights and all I can say is, for those of us who are in the compliance industry the next couple of years are going to prove to be pretty busy for us all.
GVO: It will be.
JG: Thank your Gil Van Over! For Drop the Bow Tie I’m Jim Ganther. Thanks for watching!