Police Yourselves By: Shannon Robertson, AFIP Executive Director L ast issue we featured Brother Dave Robertson preaching a warning. “The Democratic party now controls the White House and both houses of Congress, giving it nearly unbridled leverage to pursue its agenda. What does that mean for you? You can expect both the FTC and CFPB to be significantly more aggressive in both oversight and enforcement than during the last four years, particularly in the areas of vehicle sales and F&I practices.” I’d like to expand on his message a bit more this month. The commonsense question that will likely be asked of you in the very near future is, ‘Based on the retail prices you charged for aftermarket products, plus the cost of financing them for the terms of the Retail Installment Sale Agreements, do they provide benefits to those customers commensurate with the total amounts paid for those products?’ In other words, how often do your customers have the need to file claims and what are the dollar values of the benefits derived? The acid test will be the frequency and severity of the benefits paid over statistically relevant periods of time. Granted qualified actuaries will generate the actual figures for those value-added products and services. The question is ‘Do you know which ones provide the greatest number of customer benefits – and those that don’t?’ Typically, the pendulum is rarely in the middle, either too many claims or too few. Too many claims won’t be the issue in this situation, the focus will be on those with too few, especially those products and services with a statistically and significantly low claims ratio. Obviously, adjustments can be made with respect to retail prices charged. Certain peripherical or second tier products and services-which are grouped together-then sold as a one price package offering i.e. “bundled products” can blur the claims line. However, if you’re currently selling products or services that fail the ideological commonsense test, you should begin an analysis to avoid becoming a target and start culling them now. I’m talking about products that have claims loss ratios in the tenth, hundredth, or thousandth percentile. In the mind of a regulator, very low claims ratios simply don’t pass the smell test of being value added products. This may sound ludicrous but based on some anonymous tips we’re hearing, you can bet the newly energized federales don’t think so. “Given the fact the CFPB currently doesn’t have oversight of franchised dealers-thanks to clever lobbying by the NADA-they do have authority over banks. And some of those finance sources buy your contracts.” Even though he’s compliant with the rules, a well-known finance manager was recently warned by his captive about product prices on contracts they’ve been buying from his dealership. Seems they must report certain irregularities based on internal guidelines to the bureau. Big Brother is still watching. Another example was a finance manager who recently sold a service contract on an F-150 in excess of $14,000. Now, this particular manager is either extremely good or the customer was equally as ignorant especially considering the likelihood of any claims approaching this much over the life of ownership. The two questions asked of this finance manager were; 1. what is the average selling price for a service contract for that same vehicle? 2. What answer would you provide a regulator or an attorney on why you chose to sell this service contract at a price significantly higher than the average? The timely corrective action axiom normally holds true, the price paid for sins past is often less than the price paid for sins present. Corrective action on your part, as a dealer, should be implemented to avoid scrutiny. The best way to stay off the radar in these instances is self-imposed policing by establishing-and enforcing-product profit price caps. The last thing anyone wants is an FTC investigator poking around in deal jackets. To aid dealers, NADA has published a step-by-step guide under their NADA Management Series section entitled Voluntary Protection Products: A Model Dealership Policy. Taking action and being spared the negative publicity and potential fines when it is left to the regulator to expose a practice deemed to be unfair or deceptive can easily be avoided. You can do it yourself or………………….. the regulator will do it for you. 15
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