RALEIGH, N.C. — FNI Inc. president David Bafumo highlighted
three best-practice recommendations for auto finance providers when offering
captive or preferred add-on programs.

The head of the collateral protection and consumer benefit
program product and compliance agency emphasized these tip focus on topics such
as selection, transparency and management.

1.  Product and
Provider Selection

Bafumo noted that auto finance companies need to determine what
products make the most sense for the operation's kind of customer and finance
model. He pointed out that there are two hot issues in product related consumer
protection.

He first elaborated about transparency

Bafumo asked, "Is the customer provided with clear, accurate
information about what a product does and doesn't do, and what it really costs?"

Next, he discussed consumer value.

Bafumo put forth another question, "Does the product
actually provide some tangible benefit that is meaningful and useful to the
consumer?"

He went on to say, "It should be no surprise that products
with the most real value often have the simplest, most transparent contract
language and marketing materials."

The FNI president explained that many standard due diligence
elements apply to selecting product providers such as:

—Years in business
—Corporate ownership
—Leadership and stability
—Financial security
and insurance backing
—Regulatory and litigation history
—Data and privacy safeguards

Since finance providers are now held responsible for their
service providers' compliance capability, Bafumo insisted there are even more
considerations, including

—Experience specifically with products for the finance
industry

—Internal consumer protection compliance ability and
processes

—Customer-facing employee compliance

—Customer service training

—Field force stability and compliance training processes

2. Product Transparency

Bafumo stated that product transparency means explaining the
value of the product, its limitations and all the terms and conditions the
customer needs to understand to evaluate value and how to use the product.

FNI recommends a simple, standardized consumer product
presentation that includes accurate disclosures about the product's benefits,
terms, limitations, conditions and cost, followed up with a product disclosure
form customized for the product(s) for the customer's review and signature.

"Your standardized presentation and disclosure form should
be implemented with all selling and program managing employees and your dealer
partners — and documentation of their training must be maintained as evidence
of your compliance efforts," Bafumo said.

"Contract benefit limitation terms, conditions and provider
administration policies that can create discrepancies between consumer
perceptions and reality must be fully disclosed and explained up front," he
continued.

Bafumo offered a couple of hypothetical examples that make
sense to company executives but might be unfamiliar to consumers:

—If a finance company's GAP provider limits deficiency
balance payoffs by calculating benefits from vehicle ACV instead of the
underlying insurance company's actual total loss settlement, or by setting a
maximum 125 percent or 150 percent LTV cap.

—If a firm's vehicle service contract provider pays a
maximum of $65 an hour of service center labor time, commonly ships
used/salvage replacement parts to complete covered repairs, or includes a per
claim or per repair maximum limit of liability.

"Your product presentation must make customers aware of
these terms and what they mean, and what to expect in the event of a benefit
claim," Bafumo said.

3. Performance and Vendor Management

Bafumo emphasized that process design, implementation and
documentation create the foundation for effective vendor and product management.

"For most finance providers an elaborate customer complaint
management system that might be appropriate for a large national bank is not a
practical or viable option," he said.

FNI recommended a basic customer interaction process t sets
standard company policy for all customer contact regarding captive or preferred
products including calls for claim benefit assistance, cancellation assistance,
product claim disputes and resolution and product related dealer disputes and
resolution.

"Monitoring service providers for continuing compliance
capability requires an appointed responsible employee and the participation of
your product provider and your product management company or agency," Bafumo
said.

"Commitments to maintain compliance standards and provide
you with policy and company information needed to meet your service provider
supervisory obligation should be made part of your agreements with product
providers," he continued.

Furthermore, FNI recommended written annual vendor due
diligence re-certification and careful monitoring of changes in product provider
marketing materials, executive management, field personnel and internal
employees who interact with customers or dealer partners.

Editor's note: FNI also pinpointed the top 3 add-on product
hazards for auto finance providers in a previous SubPrime Auto Finance News report that can be found here.

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


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