Lending Curve
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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.
Over the last couple of years, dealerships and F&I managers across the nation have taken a close look at their F&I menu, penetration rates and Per Retail Unit in relation to overall profitability. With the CFPB trying to force a flat fee system, proactive dealerships have focused on their product sales processes.
According to recent data from NADA, on average, F&I accounted for 39.6 percent of 2014 gross profit, and 38.8 percent of 2013 gross profit for both new and used vehicle departments. The F&I portion of gross profit has produced year-over-year increases since the depths of the Great Recession in 2009. NADA further broke down F&I profit to finance reserve and product sales. They found that F&I products made up 16.3 percent of gross profits in 2014, which was marginally up from 16 percent in 2013.
F&I managers everywhere are under significantly more pressure to reduce their reliance on finance reserve and make 2015 a year when F&I product sales and penetration increase more significantly than in the past. By increasing F&I product sales, dealerships may be able to transition more easily their overall profitability from the possibility of a flat fee lending environment, increase current income levels, and generate repeat customers and referrals through products that encourage customers to return to their service centers.
