Forecast: Lenders want more up front, leaving less for F&I

ORLANDO -- Dealerships will continue to find that lenders remain unwilling to front as much money toward car loans as they used to, making sales of aftermarket products by the finance and insurance office a challenge.

That's the dim forecast from senior executives from top auto lending institutions who were interviewed during the National Automobile Dealers Association convention.

Lenders are "not advancing as much as they did in 2007 and 2008," said Tom Wolfe, president of Wachovia Dealer Services, which in March will be renamed Wells Fargo Dealer Services. "What's gone from auto financing is the exuberance of 2007. It's very rational."

The advance rate is the amount lenders are willing to lend toward a car sale. When financial institutions reduce advance rates, they are seeking to get more money up front in case the loan goes bad or is paid off early.

In a default, lenders typically incur the cost of repossessing and reselling the vehicle. When the loan is paid off early, they must refund some of the proceeds from products such as vehicle service contracts.

F&I profits stay low

The lower advance rates mean that car buyers will need to keep making healthy down payments to get financed. And dealers' F&I profits will remain depressed, in part because there is less room in the car loan to add on profitable aftermarket products such as extended service plans.

With few exceptions, the days are gone when a car loan covered the entire purchase price, as well as aftermarket products.

Ellsworth Clarke, president of dealer financial services for Bank of America, and other banking executives say car buyers now come to the dealership expecting to make higher down payments.

"The shift is away from no money down," he said. "People are going to have to put more skin in the game."

Currently, lenders are advancing 80 to 105 percent of dealer invoice price. "Advance rates of 90 to 100 percent of the invoice price is the norm," Clarke said. For used vehicles, the typical advance would be 90 to 100 percent of book value.

Before the credit crunch, dealers saw advance rates of 120 percent of invoice price on a new vehicle. In some cases, the rate was based on a percentage of the sticker price and would go as high as 130 percent.

Subprime lender Santander Consumer USA Inc., of Dallas, formerly known as, bumped up its advance rate to 120 percent of book value late last year from 105 percent. Santander, which finances customers with risky credit, primarily finances used vehicles.

"We have changed our advances to let dealers get some back-end income," said Deborah Malinowski, Santander's vice president of sales. "We are making sure they can be profitable."

Closer scrutiny

Lenders also are scrutinizing car loans closely after an uptick in fraud.

In response to more stringent credit standards, some F&I managers had a greater tendency to inflate a customer's income on the credit application. Or they would engage in "power booking" -- padding the price with equipment that was not on the vehicle -- in an attempt to maintain former F&I profit levels.

Fraud tainted no more than 5 percent of the transactions last year, says Nicholas Stanutz, Huntington Bank's executive manager of automobile finance and dealer services. The extra vigilance is catching unscrupulous finance managers more often, he said.

"Lenders are looking for it and calling out the dealer employees, so it's policing itself," Stanutz said.

Dealers have responded to lower F&I profits cutting F&I staffs and in some cases giving the responsibility for insurance to salespeople.

Because of the complexity of dealing with contracts and government regulation of finance transactions, dealers are hiring higher-caliber salespeople.

Many dealers are accepting lower advance rates as the new normal.

"We're not seeing advance rates of 120 percent of invoice," said Mark Pelafos, COO of Worden Martin, of Champaign, Ill., a group of five new-car dealerships and one used-car lot.

"But they shouldn't be that high," he said. "That's one of the reasons we've had a credit crisis: Lenders overadvanced too much to consumers."

More money down
Slimmer advance rates -- the amount lenders are willing to lend toward a car sale -- mean that dealers
• Will need hefty down payments from customers
• Can sell fewer profitable aftermarket products
• Have to watch out for possible fraud