A week before this September’s F&I Conference, I spoke with one of my sources in the industry. He’s a licensed attorney, a longtime F&I pro and a guy I’ve come to know as a straight shooter. He told me he had been notified by his bank rep that his dealership landed on the CFPB’s list of operations it believes engages in discriminatory lending practices.

As it turned out, my friend’s situation and the mysterious formula the bureau is using to identify dealers engaged in alleged pricing discrimination took center stage at this year’s conference. The good news is the CFPB no longer believes F&I offices shouldn’t be compensated for helping customers secure financing. But what it doesn’t like is the discretion finance sources allow when you mark up interest rates on retail finance contracts.

Lucky for us, the CFPB will need to get around that dealer exemption before it can get to us. And to do that, it must demonstrate that a finance source was unfair, deceptive or abusive in purchasing a finance contract from a dealer it believes has run afoul of fair lending laws. Andy Koblenz, general counsel for the National Automobile Dealers Association (NADA), wondered if that meant the CFPB expects finance sources to know exactly what the negotiations entailed. If it does, he believes the CFPB would defy its Congressional directive not to regulate dealers.

Nikki Munro, a partner with Hudson Cook LLP, offered one scenario in which the bureau could satisfy that standard. Let’s say you characterize a product you sold as a service contract on your customer’s retail installment sales contract, but your state defines the coverage as insurance. Well, you may be in violation of state laws because you misrepresented the product when you disclosed it to the customer. You may also be in violation if your state says you can’t include insurance products in your customer’s vehicle financing. If all that happens, you could end up with a federal violation issue and in the CFPB’s jurisdiction.

As for rate participation, the industry is arguing that a move to a flat-fee system will mean F&I offices are no longer incentivized to secure the best rate for their customers. Instead, as the argument goes, they’ll be incentivized to direct business to the finance source offering the best compensation. See, the characterization being made to regulators is that dealerships are nothing more than rate discounters thanks to market competition. The opposite would be true if F&I professionals are forced into working for flat fees.

“In the end, the government will be incentivizing dealers to secure higher rates, which is the precise model the CFPB claims it is trying to prevent,” said David Westcott, NADA chairman.

I agree market competition creates sort of a checks and balances under the current model, but I’m not so naïve as to think the model always plays to the customer’s advantage. And don’t think for a second the CFPB does, either.

So what does this all mean? Well, as David Robertson, executive director of the Association of Finance and Insurance Professionals (AFIP), said, it’s going to take a programming approach to satisfy regulators’ expectations.

Earlier this year, the AFIP released a rate modification form, which has F&I producers start every deal at 150 to 200 basis points above the buy rate. Working with Hudson Cook, Robertson then identified several business situations that may cause an F&I manager to deviate from that rate. All you have to do is note that reason on the form and include it in the deal jacket you send to the finance source.

Will this keep you off the CFPB’s radar? No, but Koblenz told the audience such forms have been sanctioned by the U.S. Department of Justice, pointing to a 2007 enforcement action against a couple of dealerships in Pennsylvania. According to the case’s consent decree, the DOJ viewed the form as an appropriate way of addressing questions about rate markups.

Koblenz also offered a few suggestions should your finance source contact you about pricing disparities. First, ask your bank how it divided your deals into the world, which the CFPB must do since finance sources are prohibited under Regulation B and the Equal Credit Opportunity Act from collecting race-related information. Also ask how many deals were for census tracks that were neither 80 percent or above minority or nonminority. Also inquire about the number of deals it reviewed and the average spread.

That line of questioning, by the way, is designed to poke holes in the CFPB’s use of the disparate impact theory. For more, check out Sizing Up the CFPB’s Threat. There you’ll find how the industry is preparing to defend your right to participate in the indirect financing channel.