A Matter of Policy: Agents and NADA's F&I Product Guidance

In April, the National Automobile Dealers Association released “Voluntary Protection Products: A Model Dealership Policy,” part of its series of Driven guides for dealers and other industry members. The publication was released in partnership with the National Association of Minority Auto Dealers and the American International Automobile Dealers Association primarily to offer free, optional guidance governing the presentation, sale, and administration of F&I products. 

The project was led by Paul Metrey, NADA’s vice president of regulatory affairs and chief regulatory counsel. As an attorney and executive in the association’s employ since 2001, Metrey has stood toe-to-toe with regulators and lawmakers while serving in the dual role of dealer advocate and educator. A native of the Washington, D.C., area, Metrey joined NADA after earning his J.D. from Catholic University’s Columbus School of Law and serving with the U.S. Army’s Judge Advocate General’s Corps and the Federal Emergency Management Agency. 

Agent Entrepreneur caught up with Metrey after the guidance was released to get the story behind the guidance and ask what role agents can play in sharing and enforcing its message with interested dealers. 

Paul, looking back on your NADA career so far, what are your personal highlights? 

Metrey: I entered NADA at a time when federal regulatory activity was really mushrooming. We saw all kinds of new privacy mandates with the Gramm-Leach-Bliley Act of 1999 and the Fair and Accurate Credit Transactions Act of 2003, and certainly a number of new duties related to telemarketing. So the regulatory burden on dealers escalated really quickly just as I came on the job. 

Regarding advocacy highlights, we had a number of successes in traditional areas of regulation such as tax, where dealers benefitted from several new safe harbors that the IRS created for dealers, with the most notable example being its issuance of a 2010 revenue procedure on UNICAP [Uniform Capitalization].However, much of our focus necessarily shifted to theseemerging areas. 

One example in the telemarketing arena is a 2005 declaratory ruling we secured from the Federal Communications Commission stating that phone calls from dealers to customers solely to alert them to and schedule repair work on safety recalls do not constitute telephone solicitations that are subject to the National Do Not Call rules. And examples in the credit arena include, in 2011, securing from the Federal Reserve Board and the Federal Trade Commission authority for dealers to issue a Credit Score Disclosure Exception Notice to all of their consumer credit applicants instead of a Risk-Based Pricing Notice to only those customers who received credit on “materially less favorable” terms and, in 2012, securing for dealers a temporary exemption — which is still in place — from new, massive, and ill-defined requirements in the Dodd-Frank Act related to small business credit applications. We also worked extensively to resist new, ill-advised unfair and deceptive acts or practices — or UDAP — rules from the FTC following its 2011 Motor Vehicle Roundtables and the CFPB’s extraordinary attempt, from 2012 through 2016, to eliminate pro-competitive dealer participation from the marketplace.

However, the credit crisis that hit the industry in 2008 and the Dodd-Frank legislation it spawned particularly stand out. If you go back to the credit crisis, we were trying to make sure dealers had access to floorplan financing as it was rapidly drying up. The mechanism the government created to help restore the credit markets, known as the Term Asset-Backed Securities Loan Facility, or TALF, initially was largely confined to consumer credit. We made the case to Treasury and the Federal Reserve that it was essential that the TALF also extend to floorplan financing, and they were persuaded. And we think that greatly helped invigorate the automotive asset-backed securities market, which is critical, of course, to ensuring finance sources can meet the credit needs of consumers and their dealer partners. 

All that said, one of the most significant challenges was our work to get dealers excluded from Consumer Financial Protection Bureau jurisdiction under the Dodd-Frank Act. This was quite the undertaking but, fortunately, at the end of the day, with the help of dealers all over the country, dealers were excluded and consequently not subject to the heavyhanded use of supervisory and enforcement authority that the bureau engaged in shortly after it was created. 

How did you convince them? 

Metrey: Well, a huge motivation for Dodd-Frank was this belief that there had been a market failure, particularly in the subprime mortgage segment. The thinking was there needed to be an agency to consolidate authority and aggressively try to address perceived regulatory shortcomings. The argument we made consistently was there had been no demonstration of a market failure in the auto finance arena. When auto finance sources underwrite, they do not base their decisions on the assumption that underlying collateral will appreciate in value. Rather, recognizing that a vehicle is a rapidly depreciating asset, they necessarily focus on the repayment ability of the borrower. 

It’s a very sound model. There has never been a default of any investment-grade auto ABS. It has performed remarkably well relative to other asset classes. So the basis for creating a new entity with greater regulatory authority was not needed in the auto finance arena. We made this argument and a bipartisan consensus emerged that dealers were adequately regulated by their existing federal regulators. 

And this was reinforced when U.S. Rep. Barney Frank, who was the chair of the House Financial Services Committee, stated that the legislation — not yet known as Dodd-Frank at the time — was designed to address concerns with Wall Street, not Main Street. Dealers, of course, are the quintessential Main Street entity. 

In your career as a dealer advocate, were the depths of the Great Recession as bad a climate as you’ve seen or expect to see?

Metrey: Certainly as bad a climate as I’ve seen since I’ve been at NADA. The credit crisis presented an enormous challenge and had a huge impact throughout the industry. I am not an economist, but that type of environment fortunately does not appear to be on the horizon. 

What was the genesis of the F&I product guidance and what do you hope to accomplish? 

Metrey: These products — which we refer to as “voluntary protection products” or “VPPs” — have been under attack for a while, and those attacks have picked up. You see this through a number of channels, including the mainstream press. Typically, media reports on these products are negative, regardless of the value a particular VPP may offer. We’ve also seen this in the form of federal and state enforcement actions, private litigation, and other reports and commentary suggesting the need for greater regulation. So there is a threat that exists. We think it’s important that auto dealers have an optional tool to be sure their VPP process responds to concerns raised by others in the marketplace. When the CFPB expressed concerns over fair credit in 2012 and 2013, we created our optional Fair Credit Compliance Policy & Program. We thought a similar policy for protection products would be warranted. 

Where to begin? What wason your first whiteboard? 

Metrey: Excellent question. I will tell you that drafting this policy was much more challenging than drafting our fair credit policy. The latter dealt with dealer participation, which is one element of one product that is pretty routinely applied around the country. And we had a Department of Justice template to base it on. No such DOJ program exists for VPPs. These products are quite different from one another. And the state law and contractual provisions that govern them also can be quite different. 

The way I approached the issue was to first try to make sure we drew in a lot of input from key stakeholders — VPP providers, VPP finance sources, dealer principals and GMs, dealer managers, dealer attorneys, finance trainers, etcetera. I knew that obtaining their insights would help ensure the policy reflects realities in the marketplace. 

What did you learn from agents and F&I trainers? 

Metrey: They are, of course, an incredibly important audience that provides very valuable input in a number of areas, and particularly so on this issue. Our overall focus was on transparency, including the need to make sure certain disclosures are provided. We also wanted to address areas that have resulted in adverse press or challenges recently, including the process for canceling VPPs. So their input on that was important. 

How is the policy structured?

Metrey: It’s structured in three parts: In the first, the dealership sets forth its unequivocal commitment to a transparent VPP process and states that commitment in a consumer-facing poster in the finance office. The second part explains how the dealership will implement and maintain the policy. The third part lists tasks the dealership will perform throughout the lifecycle of voluntary protection products to carry out these commitments. It starts with product selection and then moves to an optional process for pricing, advertising, presenting the products to customers, executing point of sale and post-sale responsibilities, handling cancelation requests, and addressing any consumer complaints that may arise. 

Wouldn’t you agree there is nothing in the publication that will surprise any agent or dealer who is generally up to speed on these issues? 

Metrey: I would entirely agree, yes. And I base that on the reaction we’ve received so far, which has been universally positive. It’s a useful tool — and, I will stress, an optional tool — that is supportive of the dealer’s operations. And one important area it gets into is, of course, trying to make sure the dealership adopts a consistent pricing policy for its VPPs. A dealership that chooses to adopt the policy establishes a retail price for each of its VPPs and discounts those prices only if supported by a predetermined, legitimate business reason. It then records that decision, has it reviewed by a senior official not involved in the transaction, and retains it. That is an important component of our fair credit policy, and we feel it flows over into voluntary protection products as well. 

Should agents encourage dealers to borrow language from NADA’s consumer-facing poster for their websites? 

Metrey: Dealers should discuss this as well as other aspects of the policy with their counsel. The whole idea is to ensure customers know of the dealership’s commitment to a transparent and consumer-friendly VPP process. The most effective way to convey this will depend on a dealership’s circumstances. 

Some employees might find the poster interesting, either as a crystallization of whatever compliance training they’ve received or as a wake-up call. 

Metrey: The entire policy is designed to assist a dealership in strengthening its VPP process, and that includes ensuring that the finance managers who offer the products act consistent with it. This is carried out by having finance managers participate in initial and ongoing training, make certain disclosures, and refrain from actions that frustrate the goals of the policy. It’s also why appropriate oversight is stressed. 

What is the physical layout of the policy?

Metrey: It is only two pages, with two appendices. The rest of the publication consists of instructions on how to complete it. It can be accessed at a webpage we have devoted to VPPs: NADA.org/voluntaryprotectionproducts. We have a similar webpage for our fair credit policy: NADA.org/faircredit. 

And where does the VPP program go from here? Will there be revisions? Will you follow up with agents and dealers to ask how it’s working? 

Metrey: We released the guide to our members April 2. We are now trying to make sure dealers and their business partners are aware of the policy, what is does, and how it can potentially assist them. We’re going around the country talking to groups, including the agents at Agent Summit. 

Will we hit a point in time when the policy could be revised? Possibly. We put the information out there, and we will continue to learn from people in the field about how we may be able to improve this policy or anything else that we issue.