Business Growth

Subprime Competition is Heating Up!

Eric Fruithandler, Senior Sales Executive, Specialty ChannelAccording to the latest data from Experian and Equifax, subprime market share increased 4.15 percent year-over-year, with independent auto financing capturing the majority of the market.

As the subprime market continues to expand, the industry has also seen more independent financing companies backed by private equity firms pop up. Competition is heating up and lenders are continuing to loosen their standards. While the experts at Equifax see this as a sign of “health” in the sector, many lenders see competition as another hurdle they must face in the quest to build loan volume.

So, how can lenders protect themselves from loss of marketshare?

If financial institutions continue to increase their loan cap which inconsequentially increases APR, eventually consumers will be unable to sustain the high loan payments that come with their new vehicle. In addition, not all lenders are willing to extend a $20,000+ loan to subprime consumers and compete on rate. Rather than falling into the trap of over-extending themselves, financial institutions are learning how to compete on the value of their loan.

In terms of being valuable to their dealership partners, this means:

  • providing accessible lending representatives during dealership hours;
  • having a quick turn-around on loan decisioning;
  • providing understandable guidelines on the types of consumers that are eligible for their loans;
  • implementing a quick and efficient funding process; and,
  • making the F&I manager’s job easier.

Seems pretty straightforward right? You’d be surprised at how many lenders struggle with consistency in these areas. While ease of access and clear guidelines are important in simplifying the F&I process, smart lenders understand that making their loan valuable to the consumer outside of pure APR can significantly alleviate the pressure on the F&I manager and increase the dealership’s PRU.

Of everyone in a dealership, the F&I manager has the toughest job. Consumers walking into the showroom are already interested in buying a car. Consumers in the service drive are there because they need service. For the most part, consumers in the F&I office never even thought about consumer protection products when contemplating the purchase of a vehicle. They walk through the door with defenses raised and skepticism turned on high.

Now imagine the F&I manager was equipped with a loan that provided the consumer complimentary consumer protection products, like a vehicle service contract. Instead of starting the conversation trying to overcome high consumer skepticism with a sales pitch, they are positioned as an advisor. As the F&I manager discusses the type of loan the consumer qualifies for, they have the easy transition into the F&I selling process as they explain all the benefits that come with the loan. At the conclusion, they can then ask if the consumer would like to extend the benefits to the full term of their loan. As you can imagine, this is a much easier sell.

In addition, the value that consumer protection products bring to the table assure the customer that both the dealership and the lender recognize the worth of their business no matter their financial position.  This significantly enhances both the financial institution and dealership’s brand in the eyes of consumers, resulting in increased customer loyalty and referrals. All of this, of course, means increased business and revenue for you and your dealership partners.

With over 37 years of experience in innovating agile consumer protection products that give our partners an edge in the market, EFG is your key to driving business and increasing loan volume. Contact us today to turn the heat up on results.

Business Growth

Five Keys to Success for Subprime Lenders When Expanding to New Markets

Steve Roennau Vice President Compliance EFG Companies
Contributing Author:
Steve Roennau
Vice President
EFG Companies

Subprime lenders are in growth mode and rapidly expanding in 2013.  With expansion to new markets comes a myriad of challenges for the lender.  Some of the challenges are faced directly by the lender itself and some possibly by the F&I Managers at the auto dealerships with whom they do business.

Here are five keys to success for the subprime lender when expanding to new markets.

  1. Understand specific state laws and requirements.  Most lenders are likely very familiar with the laws and compliance measures that require attention in order to conduct business in a new market.  For example, making sure your retail installment contract is state compliant is an obvious first step prior to moving in to a new market.  However, if the lender markets its own suite of consumer protection products, it’s important to ensure the product administrator has done its due diligence to secure appropriate state approvals and has made necessary adjustments to its contracts as well.  Handling all the state-specific requirements up front will facilitate a smooth transition to success in a new market.
  2. Know the demographic trends and how they impact buyer behavior.  If a subprime lender is making a move to enter a new market, the demographic study and analysis has already shown a viable business opportunity.  However, do the market indicators for unemployment, the local income metrics, and consumer confidence provide an unique opportunity for lending and the sale of the lender’s consumer protection products?   If so, what is the strategy to capitalize on this new market’s opportunities?  Answering these questions will help a lender tailor a meaningful, successful loan product offering in the new market.
  3. Ensure your consumer protection products are a fit.  Different markets may present opportunities for the lender to differentiate its loan offering.  Ensure the consumer protection product offerings provide a solution to a consumer need in that market.  Be confident that the marketing, pricing and product features speak to the demands of the new market and provide an opportunity to realize a profit.  The right loan offering with appropriate protection products in the market will help drive success.
  4. Delivery mechanisms must be sound.  Once a sound strategy is in place to facilitate the loan transaction and deliver the lender’s retail installment contract, ensure a stable electronic platform is in place to rate, contract and submit the consumer protection products.  The demand for e-commerce has never been stronger, so providing an e-solution to fulfill contracts is essential.
  5. Maintain your brand.  Whether the lender operates with a direct or indirect model, it’s imperative that the lender effectively communicates and manages its brand.  From an engaging and up to date web presence, to SEO, to effective brand reputation management, the lender should pay close attention to its brand and all its brand promises as it looks to expand and grow in to new markets.

EFG Companies has a proven track record in helping lenders expand their reach in to new markets. Contact EFG today to develop a strategy designed to help you realize success as you grow your business.

Banner Government Regulations

Make CFPB Exposure a Non-Issue

Contributing Author: John PappanastosWith the Consumer Financial Protection Bureau (CFPB) threatening to crackdown on what they deem as predatory auto loan practices, dealers and financial institutions alike are scrambling to make sure they are compliant with the fair lending requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The CFPB was created in July 2010 in an effort to consolidate most Federal consumer financial protection authority in one place.  To-date, the thrust of the CFPB’s oversight has been on rooting out deceptive advertising and sales practices, including misrepresentation of products or product costs, and enrolling customers in products or programs without their consent.   In general, the laws prohibiting these practices are not new; however, the CFPB has also stepped up efforts to eliminate discriminatory practices.  Take the following example:

Sally, a subprime borrower, walks into a dealership to purchase a car. Her F&I manager submits the paperwork to several lending institutions, who then decide to extend a rate on the loan. The interest rate offered by the lender to Sally reflects the higher risk in a loan to an individual of Sally’s credit worthiness.  The F&I manager presents Bank ABC’s rate to Sally, but what she doesn’t know is that, after getting the bank’s rate, her F&I manager increased it with the intention of the dealership participating in the lending profit.  No problem so far.

However, a discriminatory practice occurs if the F&I manager marks up Sally’s interest rate by a greater amount than the dealership typically marks up the bank’s “buy rate” for other customers, even if Sally has few other options to finance her vehicle purchase and is willing to accept the interest rate presented by the dealership.  The fact is that the bank’s buy rate already appropriately reflects the risk in a loan to Sally and the cost to the dealership associated with financing Sally’s purchase is no different than that associated with every other customer.   If the F&I manager increased the rate more for Sally than he would have for another customer because of her race, gender, ethnicity, or any other protected class, then his actions could be deemed discriminatory and both the dealership and Bank ABC could be held liable.

Some questions have arisen from lenders as to whether the sale of F&I products, such as extended vehicle service contracts, could increase their liability.  Not surprisingly, subprime lenders have asked the question most frequently as they were the proverbial “scapegoat” held responsible by many for the latest recession.  As sub-prime lenders expect to be targeted first and monitored most closely by the CFPB, it makes sense for them to double check every process and procedure to ensure compliance.

Lenders who partner with consumer protection product administrators that understand the depths of their business and the regulation that goes with it don’t have to worry.  Organizations like EFG Companies (EFG), that hold administrative licenses in every state for the sale of F&I products, have made compliance a core facet of their business, influencing everything from product development to claims and client support.

The sale of vehicle service contracts and GAP policies are some of the most highly regulated products by the states.  As long as the seller’s advertising and sales practices are sound, the responsibility for compliance actually lies with the contract administrator.

As noted previously, the majority of legal hot spots to-date concerning the sale of consumer protection products fall within marketing and advertising, where companies may inappropriately use deceptive language regarding actual product benefits, the cost of the product, or eligibility.  Advertising and sales practices are deemed sound on multiple bases.  The products available for discretionary purchase should be presented to all prospective buyers.  The features, coverages and eligibility requirements as well as the cancellation and refund policies associated with the products should be fully disclosed.  And the incremental cost associated with each product should be fully disclosed in an uncomplicated manner.

With engagement from F&I product providers that embody dependability and integrity, lenders can rest assured that their loan buyers and their dealership partners are presenting their products accurately and fairly.  EFG goes above and beyond to mitigate liability by developing customized go-to-market execution plans for each client.  This effort begins with a comprehensive review of the client’s existing processes and leads to joint agreement with the client with respect to a well-defined blueprint for compliant – and profitable – implementation.  EFG then creates customized training curriculum and conducts interactive training with the client’s field sales force and credit analysts, supported by ongoing monthly audits, to ensure that compliance pitfalls are avoided.

Sub-prime lenders have a great opportunity to bundle their loans with F&I products to increase profit per transaction.  However, lenders should keep these considerations top of mind when selecting their product administrative partners:  their operating history and customer service brand recognition in the marketplace, their compliance focus and capabilities, and their liability structure.  Whomever they choose as their partner must be strong in all three areas to provide the level of service and compliance expected from a trusted partner.