5 Trends to Watch in 2015

by Jim Henry
Automotive News
December 30, 2014

Here are five F&I trends worth watching as 2015 unfolds:

1. Political pushback on the Consumer Financial Protection Bureau (CFPB)
2. Stricter limits on dealer reserve
3. Lenders remain abundant
4. Captives step up oversight
5. Growing push to shorten F&I times

1. Political pushback on the Consumer Financial Protection Bureau. The CFPB inspired passionate political opposition even before it was created in 2010. This year, with the advent of a Republican-controlled Congress in January, the CFPB can expect an even more powerful battle on Capitol Hill.

The bureau’s critics say the CFPB isn’t sufficiently accountable. Proposed bills in Congress would change the CFPB’s structure so that Director Richard Cordray, an Obama appointee, would report to a bipartisan commission appointed by the president instead of being the only individual in charge.

In addition, critics have attacked the bureau’s use of the “disparate impact” theory as a way to prove discrimination in auto finance. The theory says that whenever legally protected groups of borrowers, such as minorities, pay higher interest rates than other borrowers with similar credit histories, it’s discrimination, even if the disparities are unintentional. In auto finance, the rate disparities are attributed to dealer reserve, the small amount of interest that lenders allow dealerships to add to the buy rate on an auto loan as compensation for arranging the loan.

The CFPB’s opponents hope that in 2015 the U.S. Supreme Court will take up a housing discrimination case that originated in Texas. The case would test federal regulators’ use of the disparate impact theory. If the theory gets thrown out in home lending, the thinking goes, that would also set a precedent for auto lending.

Such a court ruling could force the CFPB to find a new way to approach regulating auto finance. It would also provide the CFPB’s critics with new ammunition.

Of course, there’s always the possibility the Supreme Court could uphold the use of the disparate impact theory.

2. Stricter limits on dealer reserve. Dealerships in 2015 could have less freedom to vary dealer reserve amounts customer by customer. Lenders could migrate to lower ceilings for dealer reserve -- an approach the CFPB seemed to endorse this year. The CFPB said in September that “significant limits on markup, such as a limit of 100 basis points [that is, 1 percentage point], may reduce fair lending risk and significantly reduce the need for certain compliance management activities.”

On Oct. 1, Chrysler Capital cut its maximum permissible dealer reserve from 200 basis points to 175, or 1.75 percentage points.

To avoid problems with the CFPB, lenders could also switch to flat fees or some other form of dealership compensation in which the dealership has no discretion over customer rates. For instance, lenders could pay dealerships a fixed percentage of the amount financed.

In April 2014, BMO Harris Bank, of Chicago, which offers auto loans via franchised dealerships in 25 states, switched to flat fees. So far, BMO Harris Bank appears to be the only sizeable auto lender to make that switch.

Finally, the National Automobile Dealers Association is endorsing a self-regulating policy in which dealerships pick a fixed price for dealer reserve and never exceed it. Dealerships can offer a discount below the fixed price if they document an acceptable business reason from a preapproved list. For instance, meeting a competing offer is an acceptable reason.

3. Lenders remain abundant. Dealerships should continue to find plenty of buyers for finance contracts in 2015, data from Dealertrack Technologies indicate.

In the third quarter of 2014, the average number of active lender relationships per dealership on the Dealertrack network reached 10 for the first time since the first quarter of 2008. Relationships had bottomed out at 6.9 lenders per dealership in the second quarter of 2009 as many auto lenders pulled back during the downturn. An active relationship is defined as at least one transaction in the latest quarter.

Today’s business indicators are mostly positive. Auto sales are expected to continue rising in 2015. Statistics for employment and economic growth are favorable. Losses and delinquencies on auto loans have ticked slightly higher but are still low by historical standards.

As much as auto lenders insist they won’t sacrifice margin to gain market share -- Ally Financial and Wells Fargo Dealer Services made statements along those lines this month -- there are still plenty of lenders eager to do business, and even conservative lenders expect to grow in 2015.

4. Captives step up oversight. Dealerships can expect captive finance companies and some independent auto lenders to monitor the loans they originate more closely than ever in 2015, now that the CFPB is officially extending its jurisdiction to “larger” nonbank lenders.

Under a proposed rule, officially published in October, the CFPB defines larger participants as lenders that originate 10,000 or more total auto loans or leases combined a year. The CFPB estimates that definition would apply to 38 lenders, which together represent 91 percent of loans and leases among nonbank auto lenders.

Larger banks were already under the CFPB’s supervision, and many have been monitoring dealership loans since spring 2013, looking for pricing disparities between legally protected classes and other borrowers with similar credit histories.

Based on those monitoring programs, some banks have issued letters to dealerships warning them to eliminate pricing differences, or potentially the banks could terminate the relationship. Now, bigger nonbanks could follow suit.

The new rule should be in place in early 2015. The bureau said in October it expects the rule to take effect 60 days after it publishes a final version, which so far hasn’t happened.

Meanwhile, the 60-day public comment period on the proposed rule ended Dec. 8. Based on comments that were submitted, the CFPB may or may not make changes to the proposed rule before it publishes the final version.

There’s some debate whether 10,000 loans or leases is the right threshold. The American Financial Services Association, a lender group, recommended in its comment that the threshold should be 50,000 loans or leases. There has also been some discussion about the CFPB’s technical language in defining leases.

Even without the final rule, the CFPB in November notified two captive finance companies, Toyota Motor Credit Corp. and American Honda Finance Corp., that it found discrimination in their portfolio of loans originated at dealerships.

The lenders said in filings with the Securities and Exchange Commission that unless they can reach a settlement with the CFPB, the bureau would seek to impose penalties and policy changes.

5. Growing push to shorten F&I times. As retailers look to get the entire in-dealership transaction done in under an hour, the pressure will be on F&I departments to get financing approved, pitch F&I products and comply with required disclosures and signatures in 30 minutes or less.

In fact, according to the J.D. Power 2014 U.S. Sales Satisfaction Index Study, released in November, the most highly satisfied customers reported they spent 15 minutes or less “discussing and signing the final paperwork.”

After 30 minutes, scores really start to fall, according to Chris Sutton, vice president of J.D. Power’s automotive retail practice. The study also shows dealerships need to reduce the wait to see an F&I manager in the first place.

One possible solution, according to Mike Stoll, then director of the professional services group of ADP Dealer Services, is for dealerships to capture as much information as possible about the customer -- plus the customer’s permission to pull his or her credit report -- before they get to the dealership. He offered his comments in an August interview with Automotive News; ADP Dealer Services was spun off as CDK Global Inc. in October.

That way, dealerships can save time by spot-delivering vehicles -- that is, letting customers take delivery before credit is approved -- more often, Stoll said. Meanwhile, the dealership has reduced the risk by checking out the customer’s credit in advance, he said.