NADA | Lending Curve

Contributing Author:
Steve Roennau
Vice President
Compliance
EFG Companies

Last year was a great year for the auto industry mostly because consumers from all credit tiers were able to secure financing for both new and used vehicles. According to the Federal Reserve, auto loan rates for new cars hit their lowest level in the last 40 years. Meanwhile, subprime lenders increased their share of the used vehicle market to nearly 56.7 percent by Q3 of 2013.

However, those low interest rates were paired with longer terms and higher loan-to-value ratios through the first quarter of 2014. Because of this trend, NADA analysts expect subprime lenders to react to the heightened risk of potential default associated with longer terms and begin to raise their rates in the second half of 2014. In other words, the subprime low APR bubble may be bursting.

With a rate increase expected in the latter part of this year, how are you preparing to keep your share of the market?

Lenders always have that drive to compete on rate. But, when you are unsure about the potential for significant rate volatility, how do you manage the impact on your loan volume?

In reality, the F&I manager will often look beyond rate and assess the overall benefit of conducting business and maintaining relationships with particular lending institutions. Here’s a quick self-diagnosis to determine how well insulated your business is to market rate fluctuation:

How available are our field reps to our dealers’ F&I Managers and how engaged are they in the dealers’ business?
How quickly and efficiently do we provide call-backs on decisions and fund loans for the dealers?
Do our loans help or harm the dealers’ ability to sell more vehicles and sell F&I products to increase dealership profit?
Are we committed to the automotive market long term?
Do we have a solid reputation in the area of customer service?

Your availability and active engagement with the dealer is critical. Ensuring that your field reps are adding value to the dealer’s operation at every point of contact will keep your organization in a market position where dealers want to conduct business with you, regardless of rate-competitiveness. Likewise, your paper buyers must provide timely call-backs and show a willingness to put deals together for the dealer.

Strong relationships between your buyers and the dealer’s F&I Manager combined with the efficiency of your loan approval process can keep you at the top of the dealer’s lender list through the peaks and valleys of rate movement. The same thing goes for underwriting. Streamlining the underwriting process and ensuring loans are funded efficiently builds equity in your company’s brand with the dealer. The more equity you build in your brand with the dealers, the more insulated you become in a market with rate volatility.

In addition, the loan itself, in structure and added-value content, can build value in your lending institution, by encouraging the dealer to consider you as a primary lending source—regardless of market rates. Whenever possible, leaving room for the dealer to sell consumer protection products in F&I helps drive dealer profitability and may help mitigate loss for all parties on the loan. Or, offering a loan that provides complimentary F&I products could be the differentiator that continues to drive loan volume your way.

In a market where your rates will increase and lending criteria may tighten, good lenders will find a way to add value to the dealer’s business, or find themselves becoming secondary sources in the marketplace. Dealers want to know that a lender is committed to the market. They want partners that will demonstrate staying power through the ups and downs of the sub-prime market conditions. A lender committed to the dealer’s business will earn his business.

Lastly, it’s important to maintain your reputation with the end customer. Consumers are savvier today than in the past. They actively research the majority of companies with which they choose to do business, including lending institutions. If your institution is known as having poor customer service, it’s likely that customers will jump ship and refinance with someone else the first chance they get. On the other hand, strong customer service tends to keep customers in the loan and willing to utilize your institution for future financing needs

With over 35 years of working hand-in-hand with dealers across the U.S., EFG Companies understands engagement with the F&I professional, the value of solid consumer protection offerings, and the intricacies of reputation management.

Find out how EFG can move your business beyond the APR race, drive value in the market, and increase revenue streams today.

If you attended NADA, or have simply been following industry news, you know that compliance is this year’s hot topic. In the first quarter of 2013, the Consumer Financial Protection Bureau (CFPB) threw a monkey wrench into standard auto financing practices, causing everyone to rethink the way they do business. They announced their intention to aggressively seek out lenders whose practices could be deemed discriminatory under Regulation B from the Equal Credit Opportunity Act (ECOA).

This regulation prohibits both intentional discrimination and practices that seem neutral but result in negative impact to customers in a protected class. According to the ECOA, customers could fall into a protected class based on their race, color, religion, national origin, sex, marital status, and age, among others.

While the CFPB stated that they would commence audits leading to legal action against lenders, their guidance bulletin left a lot to be desired. In essence, they instructed lenders to either:

eliminate dealer pricing discretion; or,
constrain dealer pricing discretion by monitoring dealership practices and using “controls” to force dealerships to adjust their practices.

Throughout the rest of 2013, lenders and dealers alike continued to ask for clarification on what those “controls” should be and for CFPB’s auditing process. Almost a year has passed with limited clarification. Now, NADA has come out with guidelines on how dealerships can remain compliant. They also provide two options:

Option One

Establish a means of dealer compensation where the establishment of finance income does not vary on a customer-by-customer basis. To accomplish this, dealerships would charge each customer a fixed rate. This rate could be a flat fee, a fixed percentage of the amount, or a fixed number of basis points over the wholesale buy rate.

While this option makes it very easy to remain compliant, it hampers the dealerships ability to offer competitive pricing, which also limits the customer’s ability to shop for the best value.

Option Two

Start with Option One, by establishing a pre-set amount of compensation, such as with a fixed number of basis points over the wholesale buy rate. Then, allow for downward adjustments of that amount should a pre-determined condition occur, such as:

the customer is not able to make the monthly payment based on the preset amount;
the customer has a better offer somewhere else;
the dealer has a promotional offer extended to all customers;
the transaction is eligible for a lower interest rate from the manufacturer or other finance source;
the customer is eligible for a dealer incentive program; or,
documented inventory reduction considerations.

Option two gives dealerships more leeway to negotiate, but necessitates extensive dealership practices to ensure discrimination as defined by the CFPB is not allowed. What may be keeping you awake at night is that all transactions that deviate from the published policy must be recorded and documented – and we all know how meticulous F&I departments are with details. The rest of NADAs guidelines include steps to ensure this option will keep dealerships compliant with Regulation B from the ECOA.

What this means for you

While these guidelines were meant for dealerships, they offer an excellent starting point for lending compliance practices, as well. As your dealerships determine which option is best for their business, it is equally important that you complete your due diligence. So ask yourself:

Do I have written compliance procedures?
Do I have standardized forms for indirect consumer loans?
Do my employees who interact with dealerships undergo formal compliance training at least once a year?
Do I monitor and document all training, forms and compliance efforts?
Do I have a compliance officer or department who is not in any way involved in the loan approval process?

Each one of these elements is vital in explaining pricing disparities that might lead to potential violations. Keep these suggested guidelines in mind when you consult your legal counsel regarding your compliance initiatives. In addition, consider including compliance in your discussions with your dealership partners. Formalize a process and accountability system for your employees should they discover a discrepancy with a dealership. Implement a formal auditing process for both your institution and your dealership partners.

You probably already have many of these measures in place, but haven’t sufficiently connected them with CFPB’s guidelines. Consulting with your legal counsel is the best place to start taking the frustration out of CFPB compliance.

With over 36 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.