Lending Curve
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In a new world order of uber-competitive interest rates and shrinking profit margins, a significant number of lenders are supplementing revenues by promoting and marketing privately-labeled consumer protection products. While still reeling from the implementation of formal compliance processes relative to financing, discussion has grown louder regarding FTC and CFPB involvement in the oversight of the sale of F&I products.
There are many elements to consider as you review your current policies and procedures for your existing product offerings. On a positive note, having a suite of private-labeled products provides the ultimate control in pricing (and profit), and significantly more control in making sure your product offering passes the litmus test from a consumer perspective.
This being said, applying compliance standards and scrutiny to the partners you have chosen to be a third party administrator or insurer is growing in importance. A recommended starting point, as you evaluate or re-evaluate product offering, is to ask a simple question: Does the product’s benefits fulfill a real and mathematically calculable customer need (or have risk)?
It’s been eight months since NADA released their Fair Credit Compliance Guidelines to help the retail auto industry navigate today’s increased focus on regulatory compliance. As the Consumer Financial Protection Bureau (CFPB) continues to aggressively seek out discriminatory practices, more dealers and lenders are implementing flat fee programs to help alleviate these concerns, including disparate impact (practices that seem neutral but result in negative impact to customers in a protected class).
While NADA has provided this guidance to dealers and lenders as they scramble to navigate a more stringent compliance operating environment, it also means that the opportunity to make finance reserve is slimming or coming to an end. For dealers, this means they now need to focus more on selling F&I products to enhance bottom line productivity. For lenders applying a flat fee, this means re-evaluating how to remain competitive against lenders who still operate under a traditional fee structure.
Today’s indirect lenders have to compete on so much more than they are used to. Now, instead of just competing on APR, they contend with a flat fee markup and leaving room for the sale of F&I products. With all these considerations in play, it can be extremely difficult to determine how to structure your loan.
Consumers want low APR and the dealership wants to make money – that will remain constant. And, until everyone adopts a flat fee, dealers have a variety of options to choose from to achieve their goals. If you are a lender operating under a flat-fee markup, one of the best ways to differentiate yourself is to provide complimentary consumer protection products on your loans. With this option, dealerships still make money on the flat, as well as have the ability to maximize their profit potential by selling upgrades to the products on your loan. In addition, those same products protect your loan from unforeseen circumstances that could affect the consumer’s ability to make their monthly loan payments.
It’s also important to remember the value of good customer service. Making your field representatives available during dealership hours, providing swift loan approvals, and providing sufficient underwriting guidelines will go a long way to securing your business with the dealership.
Cultivating a strong working relationship with F&I managers has always separated good lenders from their competition. A lending institution may have the best rate or fee structure available, but if their representatives aren’t available and attentive, that lender will fail to see sustained loan volume from their dealership partners.
Finally, understanding demographics for the surrounding areas can help your field team better position your loan for any particular dealership. Demographics have changed significantly since 2008, and statistics like the type of employers in your area, home value trends and income levels can help paint a more comprehensive picture of their current and potential customers. With this information in hand, you have a better ability to provide lending services that support the dealership goals of selling more vehicles, and in turn increase loan volume for your institution.
With more than three decades of developing and delivering consumer protection solutions and go-to-market strategies, EFG Companies gives clients the edge in the market place. Put our agile product innovation and unmatched partner engagement in your court today.
