Contributing Author: Karen Klees, Certified Consumer Credit Compliance Professional, EFG Companies
In December 2013, the Consumer Financial Protection Bureau (CFPB) ordered Ally Financial to pay $80 million in civil penalties over Ally’s allowance of dealer markup, representing the federal government’s largest auto loan discrimination settlement in U.S. history.
Throughout 2014, the auto finance industry was on the edge of its seat to see who would be next. Rumors flooded the industry of CFPB investigations, but no news came out about another settlement. Meanwhile Chrysler Capital, Santander Consumer USA proactively took action and lowered their cap on dealer participation in October 2014.
We then waited another eight months before another lender felt the sting of the CFPB. In June 2015, BB&T announced the launch of flat fees as the CFPB announced the expansion of oversight to larger non-bank auto finance companies.
Momentum built swiftly as more rumors abounded about the CFPB targeting captive finance companies. Then, a month later in July, the CFPB announced another discriminatory auto loan resolution, this time with American Honda Finance Corporation. In this settlement, Honda agreed to pay $24 million to borrowers and to “substantially reduce dealer discretion.”
Now, Fifth Third Bank has entered into a consent form with the CFPB to pay $18 million to borrowers and to cap dealer markups. The momentum is building, and the dominoes continue to fall.
While you work to ensure your compliance with the CFPB, your dealer partners are scrambling to recoup lost profit potential from reduced dealer markup. They are focusing on selling more F&I products, lining up the lenders that fund the most money on each deal, and using the increased lending competition in the subprime market to their advantage.
And there’s the rub. How can you focus on both compliance and differentiating your institution in a flooded market?
The best way to remain competitive is to first look at your engagement model with dealerships:
- If you are moving to a flat rate, is it competitive?
- When funding loans, are you allowing room for the sale of consumer protection products, or providing competitive products built in to your financing options?
- Are your field representatives actively supporting their target dealerships – making consistent visits, helping to put deals together, etc.?
- Are your field representatives familiar with each dealer’s operations?
As more lenders cap dealer reserve or move to flat fees, there is actually more opportunity to compete on more than just APR, especially since dealers are looking at lenders with the question, “What have you done for me, lately?”
Good customer service can go a long way, and excellent customer service can go even farther. Focus on your efficiencies in providing swift loan approvals, your availability during dealership hours, and in educating dealers on your loan terms to reduce wasted time submitting loans that won’t be approved.
Right now is also a great time to evaluate how much you fund on each deal and if there is room in that amount for F&I product sales. Dealers are laser focused on F&I right now, so the more you fund for them to profit on product sales, the more likely they will be to consider your institution as preferred.
However, just as with dealer reserves, we expect the CFPB to eventually try to extend their influence into product sales. There is a way to help dealers and help yourself by structuring your loans with F&I products. By including products like a vehicle service contract or vehicle return in your loans, you have ultimate control over pricing, and therefore compliance. Meanwhile, dealerships can still increase their profit through the sale of upgrades.
Remember, your dealership partners are in the same business you are, to make money. The more you help them, the more you help yourself. With almost 40 years of developing and delivering profitability strategies for dealerships, EFG Companies knows how to give your institution the edge in the marketplace. Put our knowledge, expertise and product innovation to work today. Contact EFG