What will define F&I in 2013

As 2013 gets under way, here are five F&I trends that experts say merit watching in the months ahead. The last two, greater volume and sharper competition, began in 2012 but are expected to accelerate as the year progresses.

1. More leasing. As lease returns bounce back in 2013, we should see more new leasing. KAR Auction Services Inc. expects off-lease volumes to increase by "hundreds of thousands" of vehicles in 2013 and even more in 2014 and 2015, CEO James Hallett said in a November conference call with investors and media.

New-lease volume dropped in 2008, 2009 and 2010. That generated a corresponding drop in lease returns that are only just now perking up. According to the Power Information Network, leasing bottomed out at only 10.3 percent of retail volume in the third quarter of 2009. It was 20.3 percent in the third quarter of 2012, PIN data show.

Returning lease customers are much more loyal than loan or cash customers and much more likely than loan or cash customers to start another lease, according to Canada's Maritz Research.

2. Shorter menus. Dealership groups are limiting menu selling to a few items. The trend toward shorter menus will set up a battle in 2013 among F&I products and among their vendors for a spot on the menu.

"The real estate when you come up with the menu is very limited. You can't have too many things on there," said Ray Borg, business manager at Suburban Toyota in suburban Detroit.

Customers won't sit through a presentation that's too long and too complicated.

In 2012 more dealerships reported limiting their menus to extended-service contracts and GAP, plus no more than a couple of additional items -- such as tire-and-wheel policies, paint-and-fabric protection, key replacement plans and excess wear-and-tear coverage -- for lease customers.

3. Pressure on dealer reserve. Lenders worry about possible new regulations. Dealers at F&I conferences in 2012 said they worry that government regulators, such as the Federal Trade Commission or Consumer Financial Protection Bureau, could consider somehow limiting dealer reserve. That's the amount dealers are allowed to add to the final interest rate on an auto loan as compensation for having arranged the loan.

One problem with dealer reserve is that even if dealers don't mean to discriminate, they set the customer's final interest rate. That potentially could have a disparate impact on members of legally protected classes, such as minorities and women. If those customers end up paying more on average, that qualifies as discrimination.

Auto lenders responded to disparate lawsuits in the early 2000s by limiting dealer reserve in many cases to no more than an additional 2 percentage points on top of the buy rate. It is possible lenders could consider limiting dealer reserve further rather than let regulators do it for them.

4. Greater volume. Dealerships are working hard to increase F&I sales per new and used vehicle retailed. But to a great extent, F&I sales still go up or down 1-to-1 with auto sales. As the saying goes: "Nothing else happens until a car is sold."

In 2013 that should happen more often. J.D. Power and Associates said in a Dec. 20 forecast it expected 2012 U.S. light-vehicle sales of 14.5 million, about 13 percent ahead of 2011. For 2013, the research firm expects U.S. light-vehicle sales of 15 million, up about 3.5 percent. That's a slower growth rate than in 2012, but growth all the same.

5. Even sharper competition. Investors are pouring billions of dollars into originating auto loans, including subprime loans.

Analysts say that's partly because other investments in consumer finance, such as credit cards and mortgages, turned out to be more risky than expected during the recession. Meanwhile, auto loans proved themselves to be less risky in the downturn than many investors expected.

That combination has more money chasing a relatively constrained amount of consumer business and a limited number of new-car dealerships.

Almost as soon as auto sales started to recover, auto lenders started to worry about so-called irrational competition, in which newcomers would cut pricing and lower lending standards to chase market share, even if it was unprofitable. In turn, that would force established lenders either to follow suit or lose share.

That doesn't seem to have happened -- yet.