RALEIGH, N.C. — FNI Inc., a collateral protection and
consumer benefit program product and compliance agency for auto finance
providers,  tackled what president David Bafumo believes are the top hazards to
avoid when offering captive or preferred add-on programs.

Bafumo began first by pointing out that properly selected
and managed financial institution product programs can provide improved
consumer protection and substantially mitigate multiple kinds of product
related risks for consumers and finance providers. Those solutions can include
product performance and provider financial security issues to consumer and
lienholder cancellation as well as refund and benefit processing.

"In the current regulatory environment, greater finance
provider control over products and product processes is a good decision for
protecting finance customers and for minimizing finance provider regulatory and
litigation risk," Bafumo said.

The FNI expert noted that vehicle service contracts, also sometimes
called extended warranties, and GAP contacts are two of the most common auto
finance add-on products under the consumer protection microscope.

"And recent regulatory actions and guidance bulletins have
changed the rules and obligations for finance providers who offer these
products and the companies who administer product benefits," Bafumo said.

With that factor in mind, Bafumo delved into what he
contends are the top three add-on product hazards for auto finance providers.

1. Product Sales Presentations

Bafumo referenced the enforcement actions handed out earlier
this year by the Consumer Financial Protection Bureau against US Bank and
Dealers' Financial Services.

He explained those regulatory enforcements demonstrated
that accurate product sales presentations and transparent consumer product and
pricing disclosures are "where the rubber meets the road" in terms of consumer
protection efforts and the agency's expectations for finance provider product
compliance processes.

"Other than the selection and vetting of products and
product providers, how these products are sold by employees or dealers is
without question the most critical issue facing finance providers with captive
or preferred add-on products," Bafumo said.

For financial institutions such as banks, credit unions and
direct loan companies that offer products to their consumers at the time of
making a loan,  Bafumo contends that terms and pricing
disclosures as well as sharing accurate product benefits and limitations are
quite manageable.

For indirect finance providers, Bafumo acknowledged the
prospect of controlling a product sales transaction taking place inside a dealership
at the F&I office is "simply impossible."

Bafumo said, "Short of product failure (the product doesn't
do what it is supposed to do) or provider insolvency (the product administrator
vanishes), defects in product presentations like seller misrepresentations
(intentional or not), or consumer misunderstandings (usually not considered
their fault), are the No. 1 reasons for product complaints.

"Controlling presentations may not be possible, but setting
product presentation rules, designing standardized presentation content and
disclosures, providing and documenting employee/dealer training, and verifying
results are effective ways to protect your customers and meet regulatory
expectations," he continued.

2. Vendor Provided Marketing Materials and Traditional F&I
Sales Training

Bafumo indicated the content contained within product
providers' brochures, retail price cards, sales presentation desk mats, posters
and other collateral marketing material can be an important part of making the
product program successful with consumers and within a dealer network.

But he also conceded those shiny brochures can also be a big
compliance problem. Bafumo listed several potential pitfalls, including:

—Confusing or misleading statements
—Terms that are inconsistent with the actual contract
—Too-fine fine print
—Other designs, graphs and aggressive sales language.

Bafumo believes these elements can negatively impact a
consumer's ability to make an informed decision and can be compliance hazards.

"Following the US Bank/DFS case, marketing materials should
not contain any sort of ballpark cost or price statement or explanation that
fails to inform a customer of the true, total cost of the product," Bafumo
said.

"Marketing materials that contain 'pennies a day' or 'just a
few more dollars a month' language now belong in the trashcan," he continued.

Bafumo also fears that some traditional F&I sales
techniques and strategies often found in independent dealerships and offered as
"product sales training" by product providers to finance company employees and
dealer partners can also create problems.

"Traditional 'overcoming objections' and old-school, high-pressure
F&I training techniques are inappropriate for meeting finance providers'
new product compliance obligations," Bafumo said.

"Product sales training for finance providers and their
dealer partners should be based on a value selling transparent presentation of
product benefits and limitations," he added.

3. Product and Provider Performance Selection

Bafumo noted protection programs such as vehicle service
contracts in particular, are "high touch" consumer products. He explained these
products rely on many moving parts and players, all of which impact the
customer, the selling dealer and frequently the finance provider during the
product term and especially when the customer uses or tries to use the product's
benefits.

"For that reason, and the long, mixed history of aftermarket
service contract provider performance and failures, not much is more important
to a finance provider than informed, thorough and careful due diligence on
product and product provider selection," Bafumo said.

"All the compliance efforts in the world cannot cure a poor
product or provider choice," he continued.

Bafumo recommended careful monitoring.

"Once a product is in place, new regulatory expectations
require financial institutions to have a process for monitoring the product's
performance and the provider's ongoing ability to meet consumer protection
standards," Bafumo said.

He pointed out that systematic documentation of product
benefit performance, product complaint and resolution, and cancellation/refund
requests and processing are part of what is required to meet product management
expectations.

"And regularly supplementing original vendor selection due
diligence documentation to ensure on-going vendor compliance capabilities is
needed to meet new vendor management requirements," Bafumo said.

Bafumo also made a special note about the potential for product
cancellation.

"Singled out by the CFPB in the original add-on product
guidance bulletin, consumer initiated product cancellation is in the spotlight
and a known consumer protection hot spot," Bafumo said.

"You must monitor how your product provider handles
cancellations and have your own process that ensures consumers receive an
accurate refund," he went on to say.

Editor's Note: FNI also offered three recommendations for
best practices when it comes to add-on products. That report is coming next
week as a part of SubPrime News Update.

Continue the conversation with SubPrime Auto Finance News on LinkedIn and Twitter.


Normal
0
false
false
false
EN-US
X-NONE
X-NONE

/* Style Definitions */
table.MsoNormalTable
{mso-style-name:”Table Normal”;
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-qformat:yes;
mso-style-parent:””;
mso-padding-alt:0in 5.4pt 0in 5.4pt;
mso-para-margin-top:0in;
mso-para-margin-right:0in;
mso-para-margin-bottom:10.0pt;
mso-para-margin-left:0in;
line-height:115%;
mso-pagination:widow-orphan;
font-size:11.0pt;
font-family:”Calibri”,”sans-serif”;
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:”Times New Roman”;
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;}