Do you remember being eight years old and doing something you shouldn’t be doing, like throwing a ball against the side of the house? A parent walks outside and tells you to stop, and you do until they go back inside. Then, you start back up and before you know it, you break a window. Well, maybe that was just me, but I am sure you can relate. With everything that’s going on in Washington right now, it’s easy to take your eye off the ball and focus on rate markup. After all, regulators are shifting their attention to other matters, and even lenders are reversing some of the policies they implemented after the CFPB entered the playing field.
However, taking out the regulatory aspect, it’s simply too risky to rely on rate markups. Over the years, many states and lenders have capped the amount dealers can markup buy rates. Also, while lenders have rolled back some of their policies around rate markups, they are still more stringent than they were in 2008. It would come as no surprise if rate markups continue to tighten, and possibly even disappear in the upcoming years.
We all know the correlations between excessive rate reserve and refinancing. We also know that when a lender refinances one of our contracts, the first thing they recommend to the customer is to cancel any and all products purchased by the dealer. It’s a lose/lose situation for the dealer. Not only do you lose your rate reserve, you now give back all of your profits from VSC, GAP, and ancillary sales. The customer’s payment is reduced by a substantial amount and the lender is a hero, while the dealer is painted as the villain. And, we all wonder why CSI is down and customer loyalty seems to be a thing of the past? So, if rate reserve isn’t the answer, what’s the right way to increase F&I margins? Continue reading