Remaining compliant with F&I product regulation

The regulatory landscape continues to change as the Consumer Financial Protection Bureau, Federal Trade Commission and state regulators have put a focus on making sure lenders maintain compliance when servicing finance and insurance products. 

As regulatory rules continue to evolve, lenders must stay compliant with rules to avoid litigation which could cost millions of dollars. But the guidelines are difficult to track from state to state. GAP insurance refunds are one area, for example, that regulators have zeroed in on to ensure that consumers receive their proper refund if the loan principal is paid off early. 

Lenders are expected to document when they notify consumers of a refund and verify the refund and how it was reimbursed to maintain compliance. 

Colorado Attorney General Phil Weiser, for one, has honed in on GAP refunds and has secured more than $23.5 million in refunds to nearly 131,910 Colorado consumers since 2019, according to the office’s website. 

Auto Finance News spoke with Stephen McDaniel, founder and chief executive at compliance and regulatory risk mitigation solutions provider F&I Sentinel, on the changing F&I regulatory environment. What follows is an edited version of the conversation.  

Auto Finance News: F&I Sentinel likes to say it was “born out of the complex regulatory environment surrounding automotive F&I products.” So, what is unique about how the company assists automotive lenders in navigating this environment? 

Stephen McDaniel: We believe we are unique because of our innovative approach that combines a deep regulatory expertise with technology to provide automotive lenders with a turnkey compliance solution to address one of the most significant regulatory challenges they are facing today — managing F&I product compliance within their loan portfolio.  

When the CFPB was created in the wake of the 2008 financial crisis, the sale and financing of F&I products was much less transparent and consumer-friendly than it is today. The root causes of this were poor communication channels between the parties involved, ineffective or non-existent documentation of products as they change hands, and a lack of understanding of the products themselves and their impact on consumers.

Matt Nowels and I, as co-founders of F&I Sentinel, have a combined 50 years’ experience working as regulatory counsel in the F&I product space and spent much of that time assisting many of the largest OEMs in the country, and their accompanying finance companies, in understanding F&I products and their regulation.  

After years of working on behalf of these institutions, traveling the country to influence legislation and support consumer-friendly drafting of it, the CFPB was created, and our expertise on these products was sought. We were honored to work alongside state regulators and legislators to create regulatory requirements for these products that both protect consumers and create regulatory certainty for F&I product companies and lenders alike.  

In the years since we have begun to work with the largest automotive lenders in the U.S. to help these institutions address the risks they are facing in connection with the financing and servicing of F&I products.  

The founders of F&I Sentinel are the subject-matter experts with respect to F&I product regulation as we are its private-sector pioneers, equipping us with the deep expertise and rich historical context to inform our customers on how to maintain compliance with regulatory challenges they are facing with respect to these products.  

To fuel our efforts, we developed a software platform called CITADEL that serves as our customers’ digital repository of all F&I products that they will accept for financing, with each individual F&I product within CITADEL being credentialed by a team of experts to ensure rigorous adherence to minimum standards. CITADEL informs lenders and their dealer partners of precisely which F&I products meet regulatory requirements and minimum standards to ensure value to the end consumer. The result is a compliance management system for lenders in relation to F&I products that demonstrates sound compliance practices in the event of regulatory inquiry.  

AFN: The CFPB, FTC and regulators in many states have recently taken an increased interest in how F&I products are sold, financed and serviced. How is this changing the landscape for consumers, finance companies and dealers? 

SM: You’re right, the CFPB has certainly taken an increased interest in whether F&I products are being financed and serviced compliantly. This has manifested in the bureau issuing unprecedented enforcement actions against lenders that carry huge sums in penalties and owed consumer redress. We expect these actions to continue from the CFPB, and as we near the upcoming 2024 presidential election, the CFPB may push expansive rules and enforcement at an even faster rate.  

In addition, the FTC’s proposed rule on “junk fees” sets its sights on the sale of F&I products by dealerships so, sadly, we see regulatory action increasing with respect to these products, both with respect to lenders and dealers.  

AFN: For an automotive lender, what are the risks associated with the past funding of F&I products and refunds associated with the cancellation of the same? 

SM: The risks are plentiful and may be increasing as the current leadership at the CFPB tries to accomplish as much as possible before any potential transition that may occur.  

The issues surrounding refunds related to F&I product refunds are also complex for a variety of reasons. With respect to products such as GAP waiver, a product whose lifespan is tied to the finance agreement, the CFPB has made clear its position that lenders should be proactively refunding unearned amounts paid for a GAP waiver in the event the financing instrument terminates early due to early payoff in all states.  

Seeing the struggle of lenders, we chose to make significant investments in developing software that leverages the data we have amassed within CITADEL to provide a lender with the ability to instantaneously, accurately, and independently calculate GAP waiver refunds due to a consumer, and electronically send cancellation notices to the GAP waiver administrator and originating dealer. We call this software the Finance and Insurance Refund Recovery Calculator or FAIRRCalc, and we are very proud of the solution that we have created for our lenders.  

The refund issue is compounded in the event of a total loss or repossession of a financed vehicle because the scope of products that a lender could potentially be charged with facilitating a refund on may extend beyond GAP waiver to include vehicle service contracts, prepaid maintenance agreements, among others.  

As you can see, the issue becomes an extremely complex one, as things such as cancellation fees and refund calculation methodologies can vary by jurisdiction and even by F&I products offered within the same jurisdiction. 

AFN: To that point, what do currently proposed CFPB and FTC rules mean for lenders who finance F&I products? 

SM: Impending rulemaking by both the FTC and the CFPB could have a profound impact on auto dealers and lenders, directly affecting the way they operate and interact with consumers. 

The FTC’s proposed rules I referenced earlier concerning dealer advertising, disclosure and the sale of F&I products, if passed, will require dealers to re-evaluate their marketing practices and transparency when offering these products within their dealerships. Dealers will need to ensure that advertisements accurately represent the features and benefits of VPPs while providing clear disclosures to potential buyers. Among other things, the rule will require dealership and F&I product companies to ensure alignment of marketing materials and sales requirements with the proposed requirements, which likely will mean a significant increase in operational costs for both parties.  

While the focus of the rule and the FTC’s oversight is dealers, lenders should pay close attention because if passed there is the potential that a lender could be drawn into the rule’s snare through the Holder Rule. 

On the other hand, the CFPB’s proposed rule pertaining to nonbank lenders that would require a registry of form contracts that could include some F&I products and their provisions introduces a new layer of transparency and compliance obligations for lenders. Lenders will be required to document contract provisions, ensuring that consumers are fully informed about their financial obligations. This means lenders will need to have access to complete copies of certain F&I product forms in order to meet their obligations under the rule if it is finally adopted.  

Auto lenders and finance companies will need to adapt to these regulations by refining their operations, enhancing communication with dealerships, and implementing systems that facilitate accurate and comprehensive disclosure practices. This is where we come in, helping lenders and dealers navigate these changes to be compliant while minimizing risks and protecting their reputations.  

AFN: These proposed rules would be added to a regulatory scheme that’s already so complex, most lenders who finance F&I products can barely keep up — all with the risk of costly fines for violations. What do you anticipate for these lenders moving forward? 

SM: Existing regulatory frameworks are certainly complex, and often pose too great a challenge for lenders to properly manage and ensure good compliance standing with regulatory requirements. That is where we help lenders. The CFPB will continue to implement new rules and guidelines, and we will assist our clients in understanding and abiding by them.  

It’s also important to understand that CFPB policies are heavily influenced by consumer advocates, who have historically taken an unfavorable view of F&I products and the companies offering them. As such, we will likely see that the CFPB will continue to drive behavior changes at the dealer and F&I product company level through its oversight of the funding source for F&I products.  

AFN: The CFPB has taken greater interest in how F&I products are sold and serviced, and GAP waivers have been the most publicized F&I product in the wake of its actions. Can you speak to F&I Sentinel’s perspective on not just GAP waivers, but the full spectrum of these products?  

SM: The CFPB has been focused on enforcing the requirements for these products because it recognizes the impact it has on the financial well-being of consumers in the United States.  

F&I products are a crucial component of the U.S. consumer automotive lending industry. If you were to examine the total revenue of automotive lending against that of automotive F&I products, you would see that the F&I products’ revenue is 10% of the revenue from auto originations. This means that F&I products are, on average, adding 10% to the principal balance of auto loans for U.S. consumers, which is a meaningful amount. One large dealer group has publicly stated that 70% of all F&I revenue per vehicle is derived from F&I products with the group’s stated goal to get that number to 75%. 

GAP and vehicle service contracts are commonly the most sold F&I products, but that does not mean they are the only ones that lenders need to pay attention to. If terms and conditions aren’t carefully examined and understood, consumers may be at risk of experiencing unfair, deceptive or abusive treatment from the purchase of any F&I product.  

Lenders should be carefully examining all types of F&I products that they are indirectly financing through their dealer partners given the regulatory risk, the potential impact on the well-being of their customers and the impact these products can have on the quality of the loan.  

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