By Stephen McDaniel, CEO of F&I Sentinel
In our work with more than 100 auto finance companies, we experience firsthand how the evolution of the regulatory landscape, especially for those financing aftermarket products, has created a state of increased stress and confusion. The days of a single federal standard are gone. In its place is a complex patchwork of 50 different sets of standards. This new environment requires a more proactive approach to compliance.
To be audit-ready, auto lenders that finance the purchase of a vehicle with rolled-in aftermarket products such as Guaranteed Asset Protection (GAP) waivers, Vehicle Service Contracts (VSCs), prepaid maintenance agreements and other protection plans must go beyond routine compliance. Regulators, including those from state attorneys general and banking and insurance regulators, now expect lenders to demonstrate robust governance over the entire product lifecycle. Failing to meet these expectations can lead to Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) findings, litigation, enforcement actions, or worse, damage to your reputation.
F&I Sentinel’s solutions, including the CITADEL® platform and its Concierge Compliance Team, can help lenders manage the entire lifecycle of aftermarket products, from funding to cancellation. For more valuable insights on managing the entire process from origination to cancellation, download F&I Sentinel’s free guide: Get Audit Ready: Best Practices for Auto Lenders Financing Aftermarket Products.
That said, every audit starts at the beginning. One of the first steps in navigating this landscape and building consumer trust includes adopting a solid compliance framework in the prefunding and funding phase that can withstand regulatory scrutiny. Here are the best practices for getting audit-ready:
1. Evaluation and Vetting
The first step in achieving audit readiness is to thoroughly evaluate all aftermarket products before funding them. Regulators expect lenders to know exactly what they are financing as part of their aftermarket product plan.
- Vetting Products: A foundational element of examination readiness is ensuring that every financed aftermarket product is vetted for compliance before being rolled into the finance agreement. You can do this by building an in-house team with the necessary expertise, which can be expensive and time-consuming, or by partnering with a tech-enabled provider that understands the state-by-state and federal regulations applicable to these products and that can evaluate them against such requirements.
- Ensuring Reliability: Make sure that each product you fund is backed by an A-rated insurer. This gives you greater assurance that consumer claims will be honored.
- Consistency and Control: All components of the product, including contract terms, endorsements, declarations, and marketing materials, should be consistent and up-to-date with accurate form numbers and revision dates. It is also critical to keep a central, version-controlled repository of all approved product forms. This storage system should track and provide audit logs for approvals, revisions, and filings, which will be essential during an audit.
2. Ensure Accurate and Transparent Disclosure Pricing Practices
Beyond product vetting, lenders must ensure their pricing practices and finance contract disclosure are accurate and transparent. The disclosure of an aftermarket product’s cost is subject to the Truth in Lending Act (TILA) and its accompanying Regulation Z. Examiners may assess whether your institution has allowed pricing practices that hide the true cost or impact of these products on the consumer’s finance agreement.
- Clear Disclosures: Require that product pricing be itemized and conspicuously disclosed in both the retail installment contract and any other accompanying documents. This should clearly show the impact of the aftermarket product on the total amount financed. Additionally, put in place safeguards to ensure that the correct payee as listed on the aftermarket product form is disclosed on the finance contract. Not doing so can result in a TILA violation.
- Dealer Collaboration: Work with your dealer partners to ensure they obtain express consumer consent for the sale of F&I products. Encourage them to adopt the National Auto Dealers Association’s Voluntary Protection Products Policy, which promotes standardized F&I product pricing, provides training and oversight, and requires regular monitoring of compliance.
- Proactive Audits: Implement proactive audits of finance agreements to check for pricing discrepancies or disclosure gaps.
3. Formalize Dealer Oversight and Accountability
State regulators are increasingly holding lenders accountable for the actions of their dealer partners, especially regarding misrepresentations or aggressive sales practices. A prime example is the 2020 judgment against Santander Consumer USA, which settled claims from 33 state attorneys general for ignoring dealer fraud and inadequate monitoring. This case set a precedent for lender liability under the Holder Rule. Given that lenders can be held liable for dealer misconduct, robust oversight is non-negotiable.
- Dealer Agreements: Use dealer participation agreements that include compliance clauses requiring the use of pre-approved products and compliant sales practices.
- Required Training: Provide or require training for dealer F&I personnel on proper disclosures, cancellation rights, and prohibited practices.
- Monitoring and Mitigation: Monitor key metrics like funding volume, complaint rates, and cancellation trends at the dealer level to identify any high-risk behavior. Establish a mitigation plan with clear actions, such as elevated training, if a dealer’s behavior exceeds your predetermined thresholds.
By focusing on these best practices—from vetting products and ensuring transparent pricing to formalizing dealer oversight—you can build a resilient compliance program on the front end in the pre-funding and funding phase that reduces risk and streamlines operations, all while fostering consumer trust. This proactive approach not only prepares you for regulatory examinations but also ensures you are operating with the integrity and accountability needed to succeed in today’s evolving market.
