All turned out to be worth watching, but just two -- “Dealer reserve under fire” and “Training and more training” lived up to the hype.
Here is a look back at the five trends we watched in 2014 and how they fared.
1. Dealer reserve under fire
The Consumer Financial Protection Bureau came on like gangbusters this year, sticking to its stance that lenders shouldn’t allow dealerships to add interest -- known as dealer reserve --to the lender’s buy rate on an auto loan as compensation for arranging the loan. The bureau maintains that dealer variations in the amount of interest added can lead to higher rates for legally protected groups. It wants lenders to switch to nondiscretionary compensation, such as flat fees or a fixed percentage of the amount financed.
In September, the CFPB announced that “several” unnamed banks had agreed to refund 190,000 customers a total of $56 million, or an average of about $295 each.
In November, American Honda Financial Corp. and Toyota Motor Credit Corp. said in filings with the Securities and Exchange Commission that the CFPB had found discrimination in their auto loan portfolios. The captive finance companies said the bureau would seek “monetary relief and changes to our discretionary pricing practices and policies” unless they could reach a settlement.
The CFPB and the U.S. Department of Justice hit Ally Financial with a consent order in December 2013, which held Ally responsible for dealers charging thousands of minority customers higher rates for dealer reserve. Ally denied tolerating discrimination but agreed to pay a total of $98 million in consumer refunds and a civil penalty. Ally continues to offer dealer reserve.
2. F&I products face scrutiny
Surprisingly, the CFPB didn’t announce any new F&I product cases this year. Some experts had expected new actions in light of the bureau’s consent order in June 2013 with Minneapolis-based U.S. Bank and Dealers’ Financial Services in Lexington, Ky.
The bank and the F&I administrator were ordered to refund a total of $6.5 million to military service members who got auto loans and bought F&I products through DFS’ Military Installment Loans and Educational Services program.
According to the CFPB, the companies sometimes minimized the cost and exaggerated coverage of extended-service contracts and GAP. The bureau ordered DFS to rewrite disclosures to emphasize that add-on products are optional, that they don’t have to be financed along with the vehicle and that financing the products costs more than paying cash. U.S. Bank dropped its participation in the MILES program.
In the credit card sector, the CFPB also has a track record of going after lenders in connection with required disclosures for add-on products, such as credit score tracking. But so far, the MILES consent order is a lone example in the F&I products area.
3. Training and more training
Training got big traction in 2014, as dealers and lenders revved employee education programs in part to ward off potential problems with the CFPB and other regulators.
For dealerships, training was vital because F&I sales are often relied upon to offset thin margins on new-car sales.
Dave Robertson, executive director of the Association of Finance & Insurance Professionals, told Automotive News in fall his organization was swamped with demand from dealers for training and certification courses in compliance. In the fall, AFIP had a military-style display at a conference in Las Vegas touting the “boot camp” style training it’s offering around the country. AFIP brings the intensive course to venues nationwide rather than asking trainees to come to AFIP’s Texas headquarters or take the course online.
Dealerships also are interested in learning how to accommodate shoppers who do most of their research online, Steve Amos, president of F&I vendor GSFS Group, which has a substantial training business, said in an interview.
“Dealers have customers who are doing more and more of the transaction online before they get to the dealership. We’ve developed a curriculum to build good, solid procedures for customers who are doing a lot of their business online.”
Lenders bulked up on training, too. The National Automotive Finance Association, a trade group for subprime and nonprime auto lenders, said that in 2014 it had its first graduates of a new certification program for lender employees who monitor compliance with state and federal regulations, including dealership compliance.
4. E-contracting surge
“Surge” was an overreach. E-contracting is gaining, but year-over-year growth comparisons are tougher to make this year than they were in 2013, when e-contracting was just getting off the ground at some lenders.
Last month, Mark Singleton, Reynolds and Reynolds senior vice president, called it the “slowest adoption of a killer application in history” at a conference of the Electronic Signature and Records Association.
Analysts say cost and old-fashioned resistance to change are barriers for lenders and for dealers. In addition, many states require proprietary forms, some of which require “wet ink” signatures.
A bright spot: At Toyota Motor Credit Corp., which serves the Toyota, Lexus and Scion brands, e-contracts likely will account for about 70 percent of volume this year, estimates Jason Zahorik, Toyota Financial Services e-contract manager, up from about 60 percent last year and “basically zero” in January 2013.
5. More subprime growth
Subprime lending had room to grow this year to reach pre-recession levels, which in the third quarter of 2009 reached 39.2 percent of outstanding auto loans. But subprime growth has flattened. In fact, subprime loans lost a fraction of a percentage point of share in the third quarter this year, accounting for 38.69 percent of all outstanding auto loans vs. 38.74 percent in the third quarter of last year, according to Experian Automotive.
Within that total, the deep-subprime category -- composed of borrowers with credit scores of 500 or below -- gained slightly in the third quarter to 3.84 percent of outstanding loans, from 3.57 percent in last year’s period.
You can reach Jim Henry at firstname.lastname@example.org