Last week I had the experience of visiting with dealers in a well-known city in New York. I figured that they would be a 21^st Century dealers in tune with all the latest regulations and process technologies that will improve their overall business.  To my dismay, they were not keeping up to date. Much worse is, I observed willfully ignorant sales processes where pencils were being delivered with no concern for their dealer‘s liabilities that management is creating by doing “Business as Usual”

Pressure to adhere to all the latest changes will not come from the CFPB, FTC, Department of Justice, State Department of Banking, DMV, Attorney Generals or plaintiff attorneys.  Your pressure will come from your own business partners, your banks. Since they must adhere to all new regulations and are under intense scrutiny from the CFPB, banks are pushing down what is expected of them to what they are expecting of you, as a dealer.

Think about how it felt to learn that  the Adverse Action Notice requirement has always been our responsibility and it took two  separate dealer groups in OH, who lost suits for not giving their customers AAN that cost them millions. Those suits became “case law” which fully placed the spotlight to give AAN to every customer onto every dealer’s shoulders nationwide.  You may find it interesting that the FTC wrote. “There is no penalty for an AAN giving in error.”  You read between the lines.

Question: How does this translate to what will be the new requirement on every deal penciled under the Risked Based Pricing Rule with the “Disparate Impact Theory”?

In a previous posting I discussed Caveat Venditor and how the internet and how Disparate Impact will place focus on this. As of now you as the dealer should create the following best practices:

1. Adopt a Fair Lending/ECOA Credit Anti-Discrimination Policy
2. Create a Credit Committee with a Program Chief from senior dealership management
3. Hold a Fair Lending, Equal Credit Opportunity training with every employee who touches a potential customer.
4. Place a certificate of completion in each employees file.
5. An audit review process of every deal to ensure compliance with Disparate Impact
6. Partner with a reputable compliance management company that has a Fair Lending/ECOA Policy Template that you can give your customers.
7. Initiate a daily previous days’ deal review time. I call them Red Credit Flag meetings. Review the status of EVERY DEAL penciled, what is their credit score and what band do they fit in. Identify which finance category they fit into. Are they subprime, near prime, prime, super prime?
8. Use Electronic Interdiction Software to eliminate short cutting or lazy behaviors that can cost you as dealer thousands of dollars if not millions due to one missed flag. A software that will track every deal processed in your store and give you a Deal completion score.
9. It is the responsibility of the sales or F&I manager dealing with the customer to know the Finance Sources to which the customer’s credit application should be sent based on the customer’s categorization, as determined by their credit score and any unique credit qualities that might make the credit score unreliable.  If the manager has any doubts, he or she should immediately review the matter with the Program Chief.
10. Implement a complete Digital Sales Process that regardless of which manager desks a deal your customers are all treated the same regardless of negotiation ability.
11. Develop an “Exception Rate Justification Form” that must be placed in each deal that varies from the dealership’s rate markup guidelines.  It is a best practice to mark up each “buy rate” by the same amount in the first pencil after submitting the app to lenders and receiving an approval.
12. All Exception Rate Justification forms must be signed off by Sales Manager starting the deal, F&I Manager finalizing deal and by either the Program Chief, Dealer Principal, GM or Comptroller.
13. If you need assistance in setting up a committee, structuring a daily Red Credit Flags meeting and training on Dealership Policy on Equal Credit Opportunity and Fair Lending practices, please contact me.

Remember, enforcement will most likely come from your banking partner. An ounce of prevention cost’s less than a pound of cure.

Caveat Venditor

Paul John Machin