Contributing Author: Karen Klees, Certified Consumer Credit Compliance Professional, EFG Companies
Recently, U.S. Bank issued a letter to its dealer partners describing the bank’s policy with regards to fair and responsible lending. Well, that in itself is not news. Lenders have been issuing letters of this nature for the past few years. However, this letter did mark a significant milestone since the CFPB’s regulation of the retail lending industry. In this letter, U.S. Bank became the first lender to explain a monitoring program with a heavy focus on how F&I products are priced and sold.
To date, even with state regulations on F&I pricing, dealers have had substantial leeway to set their margins. While third-party administrators set risk-based costs for each product, dealers have the opportunity to set their margin based on how much money a lender will advance.
Along with potential reserve for originations, setting F&I product margins is the finance department’s primary way to generate profit. Because of this reliance, dealerships are very concerned about lending oversight. Meanwhile, U.S. Bank is taking what they believe is a proactive step to monitor pricing before any regulatory decisions are made. And, it’s likely that other lending institutions will observe this practice closely to hone their internal best practices.
If you are one of those institutions contemplating the implementation of a practice to audit F&I product margin, you may be in for an uphill battle with your dealership partners. Over the past few years, dealerships have increased their reliance on F&I product sales to counteract the potential for lost revenue from flat fees. Because of this, they do not want another perceived threat to once again potentially govern their overall profit margin. With that in mind, many dealerships could easily have the knee-jerk reaction of saying, “I don’t need you” if they get a letter similar to the one U.S. Bank delivered. That could significantly cut down on loan volume.
However, as a lender, you have the opportunity to educate dealers on how compliance could benefit them. Rather than simply issuing a blanket statement saying “We’re watching you,” and creating more anxiety, cultivate relationships with your dealer partners by:
- Sending your representatives to each dealership you work with to personally discuss your changes in policy, and not “what”, but “why”.
- Educating dealers on the importance of consistent pricing and implementing the 100% solicitation discussion of product benefits.
- Explaining to dealerships that consistent pricing does not necessarily have to mean less profit.
Lastly, if having control over F&I product pricing is a concern, you may consider implementing a private-labelled, full suite of F&I products on your loans. In this way, you control the pricing and potential upgrades for dealers, while also giving dealerships another tool in their belt to increase profit. This could potentially make your institution more attractive and less threatening at the same time and increase your loan volume.
It’s understandable for dealers to resist changing their F&I practices. Lenders who recognize that, and help dealers face the challenge of change, will be the ones to succeed in the coming years.
For close to 40 years, EFG Companies has helped dealerships navigate the changing regulatory landscape and remain profitable. Put our wealth of knowledge in your corner as you forge a new relationship with your dealership partners and generate mutual success in this time of stringent regulatory scrutiny.