Brien Joyce on Raising Interest, Tighter Credit and Smaller Dealer Margins
Q. How will the lender/dealer relationship evolve in 2017?
A. With a flat sales volume outlook for 2017 and the expectation that the Federal Reserve will raise interest rates throughout the year, dealers will look to gain greater profitability from their F&I operations. As part of that effort, I would expect dealers to re-evaluate their lender roster to make sure they are partnering with a broad spectrum of lenders that specialize in the different credit tiers of a given dealership’s customer base, and that will help dealers meet their profitability goals. Lenders will feel the pressure to differentiate themselves beyond traditional services, such as APR and finance reserve.
Rather, lenders that make dealer goals a priority will be the ones to increase market share in 2017. That includes scheduling ongoing in-dealership meetings to collaborate on the management of look-to-book and contracts in transit, and discussing any changes to credit qualifications. In addition, more lenders will think beyond technology solutions for automatic approvals to ensure loan officers are available during dealership hours to better manage contracts in transit and get more loans funded. Overall, we can expect the level of service lenders provide dealers to increase as lenders look to solidify their dealership relationships in a changing market.
Q. Given the rumors of rising interest rates, how will this impact lenders who serve the automotive market?
A. The combination of rising vehicle prices and lax lending standards has already begun to affect loss ratios. This, combined with the Federal Reserve increasing interest rates throughout the year, will pressure lenders to tighten lending standards, and evaluate other options to protect their loan portfolio outside of APR and loan terms. I expect more lenders to evaluate how consumer protection products can benefit them from a standpoint of protecting their loan portfolio, increasing loan volume, and controlling compliance.
Q. Will lenders begin to offer products directly to the consumer?
A. With interest rates expected to increase several times throughout 2017, credit unions and other lenders that offer auto financing directly to consumers will feel an increased pressure to differentiate their institutions outside of APR. To increase awareness of their services and reduce the likelihood of consumers being flipped at the dealership, I believe lenders will also evaluate how to use traffic driving consumer protection products as part of their marketing outreach. They’ll then have a better ability to increase fee income and consumer buy-in through the sale of product upgrades that consumers can’t get anywhere else.
Q. What role will compliance play in lending practices this year?
A. Regardless of what happens with the CFPB, lenders will also need to stay the course. You don’t stop treating customers right on the off chance that the government might not see your good behavior. Those that have robust compliance policies in place will have no reason to dismantle them even if the CFPB went away. Those who are still augmenting their policies should at least finish out their efforts, and work their current policies and procedures. It’s always better to be prepared for ongoing regulatory efforts than to get lax and be unprepared.