Dealers rely more on F&I sales, less on reserve, as scrutiny grows

Many dealerships realize they'll need to sell more F&I products to make up for a potential drop in dealer reserve, according to panelists at the F&I Industry Summit in Las Vegas last week.

The fear that tougher regulations could limit or even eliminate dealer reserve is part of the reasoning. Dealer reserve is the amount the dealership is allowed to add to the final interest rate on an auto loan as compensation for having arranged the loan.

Tyler Corder, CEO of Findlay Automotive Group in Henderson, Nev., said he wants to reduce his dealership group's dependence on finance reserve.

"I want less than 20 percent of our F&I income to come from finance reserve," Corder said during a panel discussion. "I expect our F&I people to present and sell value-added products. That's where their compensation comes from, is from selling F&I products."

Currently, Findlay Automotive, which has 27 locations, mostly in and around Las Vegas, gets around 31 percent of its F&I income from finance reserve, Corder said later in an e-mail. "This is down from about 40 percent when we started focusing on it in 2009."

He added that the rise in leasing is making it tough to increase the mix of F&I products out of total F&I revenues because lease customers are less likely to buy extended-service contracts and prepaid maintenance.

Ralph Larson, F&I director at Dick Hannah Dealerships in Vancouver, Wash., told panel attendees that his dealership group puts a ceiling on the markup for extended-service contracts.

"We run about $1,200 a copy. I hear of others making $2,000 a copy," in total F&I revenues per vehicle, he said. "But I'd rather not be one of those, wondering if everything was all right."

So why is dealer reserve attracting scrutiny by regulators?

With dealer reserve, negotiating the customer's final interest rate is up to the retailer. That means two similarly qualified customers can pay two different rates.

If a legally protected class -- for instance, women or minorities -- statistically ends up paying more, that so-called disparate impact leaves both the lender and dealer open to discrimination charges, even if there was no intent to discriminate.

Earlier this year, the Consumer Financial Protection Bureau notified lenders in general that it intends to use the disparate-impact theory "to pursue lenders whose practices discriminate against consumers." The bureau did not single out auto lenders. Most auto dealerships are exempt from the bureau's jurisdiction, but any action the bureau takes with regard to auto lenders will indirectly affect dealerships, too.

In the past, auto lenders have settled class-action lawsuits alleging disparate impact by capping dealer reserve. As a possible next step, both lenders and dealers have said that flat fees could be a way to reduce the variability among similarly qualified customers.

Some conference speakers said they're OK with flat fees provided they're close to what dealers make in dealer reserve.

"We have flats, and we're very happy with not making money on rates," said Victor Martin, finance director for Hoy Fox Toyota in El Paso, Texas. Even with flat fees, he said, the dealership's F&I revenue per vehicle more than doubled in the past few years to around $1,500.

Larson, at Dick Hannah Dealerships, said his group does around 56 percent of its volume with credit unions, which pay a flat fee in lieu of dealer reserve. He said the group, which has 13 locations and 19 new-car franchises, makes around $1,200 per vehicle in F&I, mostly on extended-service contracts.

Findlay's Corder backed flat fees, too: "I know a lot of people would disagree with me on this, but personally, I'd do just as fine with a flat-fee system."