The Cost of Compliance [SPONSORED]

  • EFG Companies
  • February 9, 2017

Compliance CostSince July 2010, the Consumer Financial Protection Bureau has made significant waves in the auto finance space. In 2013, they issued their bulletin titled “Indirect Auto Lending and Compliance with the Equal Opportunity Act” stating that they would regulate lenders on unanticipated discriminatory practices. With very little guidance on how to be compliant, lenders and dealers scrambled to revamp their anti-discrimination practices to little avail.

Between 2013 and 2016, the CFPB filed 13 enforcement actions totaling upwards of $165.17 million against auto financiers, such as:

  • Toyota Motor Credit Corporation
  • Fifth Third Bank
  • American Honda Finance Corporation
  • Wells Fargo Bank, N.A.
  • JPMorgan Chase Bank, N.A.
  • DriveTime Automotive Group
  • First Investors Financial Services Group

Beyond the restitution and civil penalties leveraged against lenders, the increased compliance oversight also had direct impact on dealer profit margins, consumer prices, and the national GDP.

According to a 2014 study of the auto finance regulatory environment by the Center for Automotive Research (CAR), regulations pertaining to employment, accounting and vehicle financing made up more than 63 percent of all estimated federal regulatory compliance costs. The administration of vehicle financing alone accounted for 71 percent of all vehicle finance compliance costs and 26 percent of total dealership compliance costs.

In 2012, a typical U.S. dealership with $38 million in revenue incurred $182,754 annually in federal regulatory compliance costs, which amounted to:

  • 21.7 percent of the average dealership’s before-tax net profits
  • $2,371 per dealership employee
  • 106 vehicle sales
  • $100 mean cost per vehicle

This totaled $3.2 billion in compliance costs across all U.S. light vehicle dealerships, representing a 3.7 percent increase in dealership expenditures and a 26 percent net profit decrease.

Even before the CFPB ramped up their compliance oversight, dealers were raising vehicle prices by 3.2 percent to account for the compliance costs they were already undertaking. Dealerships lost an estimated $441,332 worth of net business and economic activity in 2012 due to dealership price inflation related to federal regulatory compliance costs. This resulted in an estimated economic cost to light vehicle dealerships of $7.7 billion, and 10,550 direct dealership jobs lost. Overall, the impact to the U.S. economy is estimated at $10.5 billion in lost economic output and more than 75,000 fewer jobs in 2012.

Since then, compliance costs have only continued to increase, helping to further inflate:

  • new vehicle values;
  • loan terms; and,
  • loss ratios.

By now, lenders know this increased compliance oversight isn’t going away any time soon. However, the increased dealer and economic cost is taking a toll on loan portfolios. As lenders look to protect themselves from rising delinquencies that have resulted from market inflation and lax lending standards, it’s important that they also look at how to stay relevant and competitive in the market by helping dealers recoup their lost profit.

Lenders offering complimentary consumer protection products, like vehicle service contracts and vehicle return protection, have a three-fold advantage over the competition, as these products:

  1. Have the potential to protect lender portfolios from the risk of default and delinquency in the event of a vehicle breakdown or job loss by reducing the financial burden on consumers and enabling them to either keep making their loan payments, or return the vehicle with no damage to their credit.
  2. Give lenders the ultimate control over product compliance.
  3. Provide dealers the opportunity to increase their fee income by upgrading consumers to increased coverage levels.

As compliance costs and vehicle prices rise, lenders need more tools than APR and loan terms to manage look-to-book goals and loss ratios. Adding complimentary consumer protection products to their tool belt opens the door to increased non-interest-bearing income, better dealership relations, and enhanced compliance control.

With 40 years of innovating and implementing proven go-to-market strategies in the dealership space, EFG Companies understands the balance between ensuring complete compliance, and building profit margins. That balance lies in the value proposition. Which is why EFG structures its products and services to not only provide value to you, but also dealerships and the end-consumer. Our unmatched client-engagement model goes well beyond simple product innovation to mitigating liability through superior claims processes, and continuous training and auditing practices. Contact us today to fortify your loan portfolio, increase your profitability, and expand your dealer book of business.

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