Vice President
Compliance
EFG Companies
Every lender that has undergone a Consumer Financial Protection Bureau (CFPB) investigation has been hit with extensive fines and a change in process. Even the most prepared and compliant lenders have found themselves reeling after an investigation. For example, after undergoing a stringent investigation by the CFPB and the Department of Justice, Toyota Motor Credit Corp (TMCC) reached a “voluntary” resolution to address alleged discriminatory practices in its loan pricing.
Of all of the lenders anticipating a CFPB investigation, TMCC was arguably the most prepared, having completed a very thorough overhaul of their compliance procedures based on CFPB industry recommendations. If anyone was going to come out the other end of a CFPB investigation unscathed, it might well have been them.
Nevertheless, it seems that the CFPB’s agenda to use lenders to regulate dealers was not appeased with anything less than sweeping caps on dealer reserve. TMCC joined the growing list of lenders to cap dealer markup at 125 basis points for loan terms up to 60 months, and 100 basis points for loan terms longer than 60 months. And, as with previous settlements with other lenders, TMCC retains the right to pay dealers a flat fee for setting up the loan in addition to the approved dealer markup.
The TMCC settlement is momentous to the industry because the CFPB appears to have settled on a way to regulate auto lending without implementing an industry-wide flat, but rather with capping dealer markup.
This settlement seems to inform lenders across the industry that if you cap your dealer markup at 125 basis points for 60 months and 100 basis points for longer loan terms, you do not have to jump through all the compliance monitoring hoops the CFPB required of Ally.
Meanwhile, lenders have at their discretion the ability to pay a flat fee in addition to the dealer markup. So if a lender wants to make up the difference between the reduced dealer markup and what dealers were traditionally paid before CFPB regulation, they can with the flat. However, it’s conceivable that any flat that may be paid could vary depending on institution-specific factors. Lenders could find it challenging to balance competitive flats with the various costs associated with their institution.
While there is some opportunity to compete on the flat for dealer business, subprime lenders looking to differentiate themselves will still need a value-add to significantly increase dealer F&I profit. Loans offering complimentary, short-term, or limited F&I products that reflect a dealer’s consumer base position them to effectively increase profit and customer retention.
The complimentary products also make it an easier conversation with the end-customer, where the dealership gives them the option to upgrade to the entire length of the loan. This has the potential insulate your institution from subprime risk, protect the customer, and significantly increase dealership profitability.
For example, if a customer experiences a mechanical breakdown within the first six months after purchasing a vehicle, they could potentially struggle with the financial burden of paying for both extensive repairs and their monthly auto loan payment. With a six-month complimentary, limited vehicle service contract, that burden could be significantly reduced, allowing them to repair their vehicle without putting a significant strain on their finances and affecting their ability to make their payment on their car loan.
We all know the phrase, “When one door closes, another one opens.”
In the case of automotive finance, the ability to compete on dealer markup is closing. But, now lenders have a better ability to compete on the value they provide dealerships, and the end-consumer, through F&I products. By focusing on enhancing the value of your loans through targeted F&I products, you can significantly increase profit opportunities for both you and your dealership partners.
With almost 40 years in innovating and implementing proven go-to-market strategies in the dealership space, EFG Companies understands the balance between ensuring complete compliance, and retaining and building profit margins. That balance lies in the value proposition. Which is why EFG structures its products and services to not only provide value to you, but also dealerships and the end-consumer. Our unmatched client-engagement model goes well beyond simple product innovation to mitigating liability through superior claims processes, and continuous training and auditing practices.