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Penske Holds Off on Adopting NADA Compliance Program

February 18, 2014

By Brittany-Marie Swanson

BLOOMFIELD, Hills — Penske Automotive Group (PAG) officials said the dealer group will “wait and see” on whether to implement the National Automobile Dealers Association (NADA)’s new fair lending compliance program, noting that the company counts reserve as only a “small portion” of its overall income. The group also reported a record fourth quarter and year in 2013.

At its annual convention and expo in January, the NADA announced a new program that would allow dealers to document variations in rate markups on retail finance contracts. The program was developed in response to the Consumer Financial Protection Bureau (CFPB)’s recent scrutiny of rate participation policies.

“Today, the CFPB has not approved the NADA plan,” said Roger Penske, chairman of the group, during the group’s investor call on Feb. 13. “And we like the move that the NADA is getting out in front of the dealers ...

“We continue to review their plan but …,” he said. “At this particular time, it’s a small portion of our overall income as finance reserve. I just think we have to wait and see.”

Penske went on to note that he was “not real enthused” about having dealers write down multiple reasons for changing a rate because “that would encumber the transaction.” He noted that the group has taken to econtracting, a move designed to make the transaction quicker for the customer and more efficient for the group’s dealers and finance sources.

“… I think we are in the first inning here advancing to see what guidance we get as we go forward,” Penske added.

Last year was the most successful year in the company’s history, officials said, with revenue hitting $14.7 billion. During the fourth quarter, income from continuing operations attributable to common shareholders increased 19.3% to $61.7 million, while related earnings per share increased 19.3% to $0.68 per share when compared to the same period last year.  

Total revenue increased 15% to $3.9 billion during the fourth quarter. The revenue increase was driven by an 11.4% increase in total retail unit sales, including a 9.8% increase on a same-store basis. Gross profit improved 14.2% to $586.4 million, while operating income increased 15.9% to $106.7 million.

In the F&I space, revenue increased 17.4% and 15.5% on a same-store basis. F&I improved $52 per unit to $1,037. In the U.S. market, the group’s F&I per copy average was $1,021, while average profit per retail unit in International markets was $1,076.

“Seventy percent of our F&I income comes from the [United States] and 30% internationally,” Penske noted. “And when you look, 60% is product and 40% is reserve, so you will see, obviously, some … pressure as interest rates would go up. But today when you think about 40% or 70%, about 30% of it is really F&I reserve.

“And we've been operating in an environment with leases,” Penske added. “And quite honestly, in leases margins and interest rates really don’t come in to play because you are really talking about our lease payment and that's 55% of our Premium/Luxury business would be leased.”

The company retailed 366,200 units in 2013 and has a positive outlook for the coming year. In 2013, PAG acquired commercial vehicle distribution businesses in Australia and New Zealand, as well as dealerships in the United States, United Kingdom and Italy.

“I am very pleased with our performance and believe our results continue to demonstrate the strength, the diversity and the resilience of the PAG business model,” Penske said. “With a strong balance sheet and the product outlook across our automotive dealership, our car rental and commercial vehicle businesses are poised for continued growth.”

Comments

  1. 1. William V. Fowler [ February 18, 2014 @ 12:23PM ]

    I agree with PAG's position, in fact I have just complete extensive research in this area and I have found out that in effect the CFPB, and the FTC has the authority to raise either disparate impact or disparate treatment issues with every auto finance, leasing provider, or motor vehicle dealer because of the new requirements that have gone into effect by the different Federal and State agencies. Financing sources as well as their dealers are asking for clear direction on how to comply with these requirements, and they are not getting the answers they need.

    So Here Are Some Facts.
    If you realize it or not the fact is each finance source and/or motor vehicle dealer are now facing each and every day when a person applies for a new loan or lease using the old system dealerships have been using to finance or lease, the sale. The old system allows the FTC or the CFPB to question your decision process for potential disparate impact, disparate treatment on issues such as the color of their skin, as well as the financing terms and conditions of the loan or lease offered to the customer. The practice of structuring loan packages by the dealer that allows steering minority, or any borrowers into higher-priced sub prime loans is not just unacceptable, it’s now illegal. Different states and federal agencies are absolutely committed to eradicating these practices. What the government is stating is that lending discrimination in all its forms will not be tolerated,!
    For more details on these issues please down load the attached .pdf

    https://www.enetfs.net/en/Sales/What_Constitutes_Disparate_Impact.pdf

  2. 2. David Ruggles [ February 18, 2014 @ 02:11PM ]

    It would be nice if the CFPB would tell us how to identify protected class members upfront and how they want them treated. But it is illegal to ask about one's race, gender, country of origin, etc. and we're supposed to provide them the same treatment as everybody else, yet it is also against the law for us to compare notes with other dealers to make sure protected members get identical treatment .... they call that "price fixing" or restraint of trade .... if we guess wrong they punish our lenders.... so what are we to do? The CFPB has license to go on witch hunts and make up the rules as it suits them based on their agenda to prove discrimination exists in auto finance. Fact is, no one I know in the business discriminates. We try to get the most out of every customer regardless of race, gender, etc. And the best negotiators get the best deals. Isn't that what the FTC wants? Seems like the Federal agencies need to get together and talk.

    Perhaps I can get a protected class membership card for being 65, wearing glasses, and being bald.

  3. 3. Randy Henrick [ February 19, 2014 @ 06:44AM ]

    ECOA's plain language does not include a "disparate impact" claim. A regulator is not entitled to Chevron deference when they make up regulations not within the law's provisions, and disparate impact is not. This is why the DOJ bought off two plaintiffs challenging disparate impact under the FHA (same language as ECOA) in the U.S. Supreme Court the past two years and why no federal appellate court has ever approved of a "disparate impact" cause of action under ECOA. In fact, the D.C. Circuit expressed skepticism about it.

    That being said, lenders who are following the CFPB's completely indefensible legal positions are going to come after dealers who they conclude have charged statistically significant (20BP or more) higher rates to protected persons. Any dealers looking to protect themselves from the madness going on with these disparate impact claims would be wise to adopt the NADA program. Why? Because Reg B specifically indicates that if you have a "legitimate nondiscriminatory reason for its action." See Commentary to Section 1002.4, paragraph 4(a)(1), (ii). The NADA program uses the DOJ's template for documenting legitimate non-discriminatory business reasons for managing a disparate impact risk in rate differentials.No credible disparate impact claim (assuming the claim even exists) can be made if you can document your legitimate nondiscriminatory business reasons for varying from a pre-established fixed markup rate.

  4. 4. William V. Fowler [ February 23, 2014 @ 04:00AM ]

    Randy's statement helps to make the point I have tried to explain previously. Reference: "Any dealers looking to protect themselves from the madness going on with these disparate impact claims would be wise to adopt the NADA program. Why? Because Reg B specifically indicates that if you have a "legitimate nondiscriminatory reason for its action."

    It is the act(s) by the dealer personnel in establishing their so called "legitimate nondiscriminatory reason for its action." that opens the door for potential disparate impact, or disparate treatment. When a person at the dealership makes any type of a decision concerning interest, or the selection of the lender(s) as well as other choices they make on putting a deal together they have the problem of opening the door to disparate impact, or disparate treatment.

    There is no way that a dealership, or a person at the dealership can remember, or sometimes even substantiate the reason why they made one decision over another a day, week , month or even years later. The problem is the human element in making those decisions that opens the door for a sharp attorney to open the argument for disparate impact, or disparate treatment.

    Another fact is the CFPB requires that the dealer use the exact same process each and every time when making those decisions. When you have more than one person at the dealership making those decisions that would be impossible unless you had a computer system make those decisions at the dealership, then you would have a record years later establishing the reason for the computer program making those decisions. The point that everyone is missing is the human element is the wild card in the matrix, remove the human element with a computer analysis program and you have a defensible means to justify a decision, plus you have a record a dealer or financing source can recall instantly to justify the reasoning.

  5. 5. William V. Fowler [ February 23, 2014 @ 04:19AM ]

    Disparate Impact
    Disparate Impact against other people happens all the time all around us. Almost everything we personally do can create disparate impact towards other people if we intend it or not. For example a lender's policies, even when applied equally to all its credit applicants, may have a negative effect on certain applicants. For example, a lender may have a policy of not making auto loans for less than $30,000. This policy might exclude a high number of applicants who have lower income levels than the rest of the applicant pool. That uneven effect of their policy is called disparate impact.

    Disparate Treatment
    Disparate treatment occurs when a lender bases its lending decision on one or more of the prohibited discriminatory factors covered by the fair lending laws. For example, if lender offers a credit card with a limit of $750 for applicants age 21 through 30 and $1,500 for applicants over age 30. This policy violates the ECOA’s prohibition on discrimination based on age.

    Predatory Lending
    Fair lending laws also contain provisions to address predatory lending practices. Some examples follow:
    • Collateral or equity “stripping”: The practice of making loans that rely on the liquidation value of the borrower's motor vehicle rather than the borrower's ability to repay.
    • Inadequate disclosure: The practice of failing to fully disclose or explain the true costs and risks of loan transactions.
    • Risky loan terms and structures: The practice of making loans with terms or structures that make it more difficult or impossible for borrowers to reduce their indebtedness.
    • Padding or packing: The practice of charging customers unearned, concealed, or unwarranted fees.
    • Flipping: The practice of encouraging customers to frequently trading a motor vehicles solely for the purpose of earning additional loan-related fees.
    • Single-premium credit insurance: The requirement to obtain life, disability, or unemployment insurance for which the consumer does not receive

  6. 6. William V. Fowler [ February 23, 2014 @ 04:44AM ]

    In effect the CFPB, and the FTC has the authority to raise either disparate impact or disparate treatment issues with every auto finance, leasing provider, or motor vehicle dealer because of the new requirements that have gone into effect by the different Federal and State agencies. Financing sources as well as their dealers are asking for clear direction on how to comply with these requirements, and they are not getting the answers they need.

    So Here Are Some Facts.
    If you realize it or not the fact is each finance source and/or motor vehicle dealer are now facing each and every day when a person applies for a new loan or lease using the old system dealerships have been using to finance or lease, the sale. The old system allows the FTC or the CFPB to question your decision process for potential disparate impact, disparate treatment on issues such as the color of their skin, as well as the financing terms and conditions of the loan or lease offered to the customer. The practice of structuring loan packages by the dealer that allows steering minority, or any borrowers into higher-priced subprime loans is not just unacceptable, it’s now illegal. Different states and federal agencies are absolutely committed to eradicating these practices. What the government is stating is that lending discrimination in all its forms will not be tolerated,!

    At the present time state and federal government officials has taken a firm stand against any form of discrimination in motor vehicle sale, or leasing. The CFPB has also taken a specific stand on the issue of UDAAP’s. I must remind you that these laws and issues exist right now if you are making loans or leases today, more than likely you are setting yourself up with the possibility of being charged with disparate impact, or disparate treatment against your customers. Yet I see dealers and their financing or leasing sources continuing to do business as usual as if this problem will never bother them.

  7. 7. William V. Fowler [ February 23, 2014 @ 04:54AM ]

    The old method of setting up loan packages, setting values on the vehicle traded in, or the vehicle being purchased without justifying their value is extremely dangerous. The idea of selling products or insurance under false pretense without full disclosure, or selecting the financing or leasing source based on the best return for the dealer is over. The reason it is now required that a dealer disclose “Adverse Action Notices” for all the financing or leasing sources risk models at the same time, is because the dealer is now required to make a full disclosure on all the financing sources or leasing services offers, as well as a disclosure for each of their acceptance or rejections in all their risk models at the same time. Side by side disclosures!

    Now For A Few Questions.
    With the above thoughts in mind my question are:
    • How does a dealer or their leasing/financing sources control the human element involved in structuring or selecting the right loan or leasing package for the customer, after the customer has selected the vehicle and all their add on products?
    • Then after the loan package is developed how does the dealership F&I department select the leasing or financing source to send the offer to?
    • How can you expect an F&I manager to memorize all the details of all the risk models for the multiple financing sources the dealership is associated with, digest the credit bureau report, the trade in values and the new car values, the different insurance cost as well Gap, etc and then calculate all that in their mind and then make a full disclosure of all that information to the customer?
    • How would the dealership be able to make all that information available to the Financing or Leasing sources, or the CFPB so as to verify the grounds a particular loan or lease package was put together by the F&I manager a year or 5 years later?
    Within those questions provides you a small idea of the problems a dealer, financing, or leasing sources will face with each sale.

 

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