Risk Based Pricing Rule - Further Clarification

Some of my dealer friends are thinking that compliance with this rule will be harder than it's going to be.

 
Let's look at it closer:


Starting Jan 1st 2011, you will just have to give consumers a new notice, called a Risk Based Pricing Notice.


The Government means to protect the consumers who, because of bad credit scores, won't get the same credit terms as those with good credit scores.


This notice is meant to make these consumers aware of this.


So dealers need to give EVERY applicant for credit - whether or not you get them financed - a notice that:


1. Shows them their credit score and which CRA it was pulled from,

2. Tells them what a credit score is and steps they can take to change it,

3. Displays a bar chart or other visual that shows where their credit score compares with the national average.


These notices will be available (at an additional charge) from the vendors that you use to pull your credit reports.


Simple.



Next Post: My original rant about the Risk Based Pricing Rule: CLICK HERE

The post also contains a link to the full 202 page text of the rule... exciting.


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Risk Based Pricing Rule

As the Risk Based Pricing Rule goes into effect Jan 1st 2011, how many of you already have a negative view against it? More government regulation inflicted upon automobile dealers. More of our taxpayer dollars spent on a useless and confusing program

What is the Risk Based Pricing Rule and how is the automotive industry required to comply with it?

Here is a link to a good article written by Randy Hendrick (Dealer Track) for F&I Magazine: http://www.fi-magazine.com/Article/Story/2010/03/New-Credit-Rules-Decoded.aspx.

Randy points out that "the new notices are intended to complement adverse action notices, which dealers are already accustomed to issuing when they can’t attain financing for a customer. The difference with the risk-based pricing notices is that they must be handed to consumers before the transaction is consummated; that is, before the customer signs the retail installment sales contract (RISC)".

So it sounds like this is another item that will be required to be included with the customer's paperwork, and moved from one paperwork stack to the other, at the step directly before they sign the RISC.

Ok, so why exactly do we need to do this?

Below is a link to the full 202 page text of the rule: http://www.ftc.gov/os/2009/12/R411009riskbasedpricingfrn.pdf

Basically, the FTC and the Federal Reserve Board are trying to look after the public, specifically those who have less than perfect credit. They are requiring creditors (yes - dealerships are creditors) to give notice to consumers when their credit caused them to receive higher interest rates.

A dealership would need to calculate their average contract rate per financed customer, and provide this required disclosure to anyone who doesn't qualify for this average rate.

??? Talk about opening up a can of worms. How many times could doing this cost a deal? Or almost as bad - giving them a reason to walk out of the dealership under the premise of checking with their credit union.

Let's look further into this...

The finalized rules implement Section 311 of the Fair and Accurate Credit Transactions Act of 2003. The rule states that dealers can determine which customers should receive the notices by using the dealerships average credit score or their average credit tier.

The Dealer Exemption

There is also a dealer exception that doesn't require a notice to be given, but will require that the dealer spend extra money buying a product from the credit bureau they used in their decision. This product will show the credit score of the customer and where the score falls within the national average of scores.

NADA's response statement:

“Due to the difficulty in determining which subset of credit customers must receive risk-based pricing notices, NADA strongly urged the agencies to create an optional compliance mechanism that would allow dealers to provide all of their credit customers with a simple notice that satisfies the requirements of section 311,”

The statement reads:

“The agencies adopted this recommendation by permitting an exception notice to be issued in lieu of a risk-based pricing notice provided it contains the consumer's credit score, date the score was created, certain information to put the score in context, and additional boilerplate language concerning credit scores, credit reports, and how consumers may access their credit report".

Like the risk-based pricing notice, this notice must be handed to the customer before the transaction is consummated.

In conclusion:

The rebel in me wants to find some "generic fill in the blanks" form for the F&I Manager to hand-write the days date and the customers credit score copied from the top of the pulled credit report (that we already pay for). I will be looking into this after this post is published.

My amazement at the use of our tax dollars is never-ending - this program is confusing at best. There also seems to be no "teeth" anywhere in the text of the regulations, unless I missed it. What are the exact penalties for non-compliance?

Hmmm...

Most dealers will probably go for the dealer exception - handing EVERY customer a Credit Score Disclosure Form. This will require the dealership to buy the form from either Equifax, Experian or Transunion, and spend resources to print it off just to comply with the rule.

Requiring compliance is going to basically create another profit for the three credit bureaus at the expense of the automotive dealer.

Ok, I need a break.




Next post: AFI's take on the new "Safe Harbor" Privacy notices: CLICK HERE


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Turning Compliance into Profits

This is a good article by Denny Long

Many dealers see new regulations as nothing but a burden. Denny Long sees them as an opportunity to sell more cars.

For auto dealers, “compliance” doesn’t have to be a dirty word. The most successful dealers I know all use compliance as a way to ensure more consistency in their sales process, make more sales and increase their profits. Let’s take a quick look at the rules regarding Adverse Action Notices, then learn how the aggressive creativity of one dealer totally transformed new compliance rules into a highly effective system for creating additional sales and profits.

You are required to provide Adverse Action Notices

It’s a common belief that financing sources, not dealerships, are responsible for issuing Adverse Action Notices. That is incorrect. Dealerships are considered to be participating creditors because they make decisions on which finance source to use and, in some cases, the decision not to send an application to a finance source. All participating creditors are required to provide Adverse Action Notices. So if you’ve got to do it, let’s look at the positive aspects of these rules.

What triggers the need for an Adverse Action Notice?

Another common misconception is that an Adverse Action Notice is only required once a credit report is requested. In reality, any time a full or partial credit application is submitted to you by a consumer, you may owe that consumer an Adverse Action Notice. The entire interpretation of the law cannot be covered in this article — the NADA Adverse Action document is larger than this magazine! But I would like to provide a brief explanation to help you understand how this law makes it possible increase sales and profits. So let’s get into the good stuff.

You may detect a sense of frustration in articles written by marketing people. Why are we frustrated? Because we work so hard to generate leads and many are never contacted, let alone properly worked. I’m sure this is not a problem at your dealership, but it does happen. You can probably imagine how excited I get when a law is introduced that states you must contact all your credit applicants. Because there will need to be recordkeeping to prove that the notices were provided if you are ever audited, you must have a tracking system in place. Follow-up and tracking that’s required by law — is this a great country or what? Again, we can’t cover all of the laws in a short article, but we do want to discuss a couple of areas that will really pay off for you.

Getting creative

As mentioned above, I know a dealer who took the rules and got creative to make them work to his advantage. First, he has software with automatic triggers to search his system each week for Adverse Action Notices that need to be printed. He then contracted with a printing company to produce full-color, 8 1/2” x 14” notices that stand out from the boring, black and white, standard-size letters that meet the minimum requirements of the rules. He uses the additional space and added impact of the color to add coupons and other offers to get more bang for his buck. Using this software and his creativity, he has a foolproof system that turns every Adverse Action Notice into an awesome-looking sales and service marketing program ... Genius!

Notice of Incomplete Application

If you receive credit applications from your Website or a lead provider, you must first ask for the consumer’s name and address so that you have the minimum required information to provide an Adverse Action Notice. If any of those applications are missing the minimum information required to submit the application to a creditor, you must send the applicant a Notice of Incomplete Application. This alone is significant because your employees now are required to follow up on every application.

You may find this hard to believe, but some of the consumers who receive a Notice of Incomplete Application actually call the dealership to complete the application. The more completed applications, the more vehicles sold (there’s that sense of frustration again).

The creative dealer has set up his system to automatically scan the required fields. It looks for the blanks and then lists the missing information in the letter. In most cases, there are only one or two pieces of information missing, such as previous employer or Social Security Number. This assures the consumer that they’re not going to have to start all over again. This dealer then takes the additional room in his larger format letter and adds coupons for things such as free DVD players or gas cards just for stopping in to complete their applications.

Minimum required income

This is another field that often causes leads to be “cherry picked” and ultimately ignored. Again, if someone submits an application, you can no longer just toss it because the income is too low. You will need to set up a version of a letter that lets the customer know that you can’t process their application because their stated income is below the level required by your available lenders. I suggest that you actually show the minimum amount required by your lenders on this letter.

Some of the consumers who receive that letter will realize that their income is above the stated figure and call in to correct the information. Another found prospect and, possibly, another found sale! The creative dealer takes the process one step further and suggests other sources of income such as alimony, child support or Social Security that can be added to exceed the minimum requirements. He then adds two coupons to the bottom of the letter — one that gives an incentive to come to the store (such as the DVD player or gas card mentioned above) and the other for a great deal on an oil change. He figures that if they can’t buy a newer vehicle, they’re going to need to take care of their current vehicle. (Excellent Idea - AFI).

There’s another bonus to these rules: It’s a lot easier to get your employees to do the follow-up and tracking of these consumers when it’s required by law, not just because that’s what the boss wants. After all, fines can be as high as $1,000 per incident, not to mention the potential for costly class-action litigation. If you are required to send just 500 letters per month, you can certainly afford to spend a little extra to mail letters that might turn into sales.

I suggest that you look into software that will make Adverse Action Notices easier if you don’t already have such a system. If handled properly, there can be great benefits to following these rules. There’s a good chance you will sell a few extra vehicles every month thanks to the tracking and follow-up that is required, and more sales is always a good thing. Good luck and good selling!

Denny Long is senior vice president at Dealer Marketing Services. E-mail him at dlong@special-finance.com.


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Are You Compliant? Part 1

A Review of Recent Developments Part 1
By: Todd Clarke

Fantastic article! AFI

You may be aware of these five compliance rules, but do you know how to stay off the radars of regulators and plaintiff attorneys?

Compliance expert provides a quick review, and offers his secrets for keeping regulators and attorneys at bay.

Every vehicle needs a regular tune-up to keep it running at peak performance. And a car dealership’s compliance efforts are no different.

Even the most comprehensive compliance program needs to be reviewed and updated regularly.

Otherwise, just like the cars we sell, compliance can break down and lead to serious headaches.

Adverse Action Notices

One of the most significant compliance issues to arise in 2007 has to do with adverse action notice requirements. These are the notices sent to customers when they are turned down for credit, or when they are offered different credit terms than what was originally applied for.

There hasn’t been a lot of formal guidance on when dealers are required to send out notices. Many dealers have made it a practice of sending all their deals to a finance company regardless of the customer’s creditworthiness. They do this in an attempt to transfer the responsibility of sending the notice to the finance company. The problem is, even if that practice is compliant, which is debatable, you are putting your dealership in the hands of someone else.

If the matter went to court, what would you do if you had to prove that the finance company did send the notice?

Recognizing the lack of guidance in this area, the National Automobile Dealers Association (NADA) recently issued dealer guidelines covering an array of scenarios. Now, these guidelines are just suggestions on how to navigate this regulation, but many courts and regulators tend to rely on these guidelines since they represent the only formal guidance available to dealers. And that’s good news for you.

Here’s what the guidelines say about when a dealer is required to send an adverse action notice:

• When a customer’s credit is so bad that you don’t send the deal to any finance company.

Next page: part 2

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Top Compliance Concerns for 2008

Top Compliance Concerns for 2008
by : Gil Van Over

There are risks, and there are risks. If you are late to an important appointment, meeting or date, you balance the risk of exceeding the speed limit and making the meeting on time versus the risk of obeying the law and potentially losing face if you are late.

If you are trying to reduce your belt size, you balance the risk of adding pounds versus the pleasure of a Reuben sandwich with cottage fries at lunch.

If you are a movie star or a recording artist, you run the risk of losing your audience when you use your star status to forward an unpopular opinion or belief or religion.

A dealership faces risk every day in every part of the business. The smart dealers understand that they must have the information available to understand how to manage these risks. Here is some information…

Higher risks

There are innumerable risks in a dealership’s sales and F&I processes. Some are pretty low risks, while others are a relatively higher risk. Here is my list of the higher risk areas a dealership faces in 2008:

• Identity theft
• Packing payments
• Forging signatures
• Falsifying income
• Power booking
• Straw purchases
• Sub-prime acquisition fees
• Forms execution
• Adverse action notification
• Rebate administration

One at a time:

Identity theft – The bad guys are out there and they ain’t going away. Many people are focused on the meth heads that use ID theft as a way to fuel their habit. However, many of the articles flowing through the Internet now uncover the ID thieves as employees at dealerships and banks. Make sure that you have a solid Safeguards program in place, including periodic audits and training. Keep a vigilant eye on those employees that have access to consumer’s non-public, personal information. Finally, ramp up your organization to embrace the Red Flags Rule requirements. You should have already started to develop and implement the program with a drop dead date of November 1.


Packing payments – This potentially deceptive practice is specifically illegal in California and other states are looking to pass similar statutes. The dark side opines that a consumer has the right to know the right payment amount for the item being negotiated at any point in the negotiations. The judges and juries tend to agree with this notion. With the number of desking systems now available to dealerships, payment packing should become as ancient as 8-track technology, but it still makes occasional appearances. You should implement a process that prohibits payment packing, whether you use a desking system or a sharpie.

Forging signatures – Logic dictates that this criminal offense should not be on this list because it should not even be a course of action any reasonable person would take. Think again. Perhaps out of laziness, perhaps out of oversight, perhaps out of brazenness, forgeries are happening every day at dealerships. Most of the time it is not on a contract or an enrollment form. Most of the time it is on a menu or an odometer statement or a rebate form. Regardless of the document, any signature not affixed by the consumer is a forgery. You must make it a policy that forgers will be fired and follow up if you find a forgery.

Falsifying income – This is bank fraud. Let me repeat, bank fraud. If the bank or credit union catches you, they will report you to the Feds using a form called a Suspicious Activity Report. I don’t know about you, but I shudder to think that my name is associated with a suspicious report on file with the government. A few dealers have had enough SARs filed against them that the banking regulators turned the case over to the FBI, who investigated and raided and still retains the files. You can help avoid the FBI raids by diligently monitoring credit application information. Look for strikeovers on credit applications, or an inordinate amount of Social Security income as additional income. Have your IT people run a scan on your systems looking for paystub templates or Social Security award letter templates. Review a sampling of deals and compare the income in the file to the income listed in Route One, Dealer Track or CUDL transmissions.

Power booking – Bank fraud II. Like falsifying income, dealers found guilty of power booking deals will have an SAR filed against the dealer. Same scenario as above. Too many SARs and the FBI comes calling. Set up a process where a manager is required to sign and date every bookout sheet that leaves the dealership. That person is responsible to accurately represent the vehicle’s options and miles. If the manager lies to the bank, the manager is looking for a job somewhere else.

Straw purchases – Bank fraud déjà vu. Straw purchases generate SARs. Straws are also specifically against the Texas state statutes. You need to establish a policy that straws are not acceptable and enforce the policy.

Sub-prime acquisition fees – With the current focus on sub-prime lending, regulators, politicians and opportunistic plaintiff’s lawyers will put a magnifying glass on sub-prime transactions. Add to the mix that the vast majority of consumer lawsuits against dealers that I have worked on as an expert witness involve a sub-prime customer as the plaintiff. If you have a process that increases the price of a vehicle to accommodate a sub-prime acquisition fee, you are running the risk of a Truth in Lending based lawsuit. You must take the sub-prime acquisition fee as a cost of goods sold.

Forms execution – As simple as it sounds, it appears to be just as difficult in execution. The forms used to close a deal are pre-printed. The computers used to complete the forms can be programmed to properly fill in the blanks. Some dealers just don’t get it and fill them out incorrectly. The lenders continue to accept the deals instead of kicking them. Now, plaintiffs’ attorneys are using this as evidence that the dealership intended to confuse the consumer, thus committing fraud. Have your F&I manager print a sample retail and lease deal. Make sure everything is printing where it is supposed to.

Adverse action notification – This issue is likely the most confusing one that a dealer faces. Should I or shouldn’t I? Unfortunately, like those old commercials, we don’t have a hairdresser with the magic answer. Some plaintiffs’ attorneys are funding their retirement incomes on this single issue. The NADA provided direction late last year with a management guide. You should review the guide with your attorney and decide what you need to do.

Rebate administration – Some manufacturers apparently consider rebate audits as an income center. I have heard of seven-figure chargebacks at single point stores. You should consider conducting your own periodic audits to ensure that you don’t owe the factory any more money.

Gil Van Over is the president and founder of gvo3 & Associates, a national compliance consulting firm that specializes in F&I and sales compliance and training.

Link to Dealer Magazine Article


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