Are flat finance fees inevitable? How to lessen the blow

Flat finance fees are coming.

And if you now derive more than 40 percent of your F&I revenue per vehicle from a finance reserve, you’re in trouble.

So says Larry Dorfman, CEO of F&I provider EasyCare.

He warned that flat fees are on the horizon during a conversation on the sidelines of the National Automobile Dealers Association convention in San Francisco last month. Last week I asked him to expand on his comments.

“There’ll be a flat fee of some number, who knows what it is -- $150 or $200,” Dorfman said. “At the end of the day, the banks have been trying to push the responsibility for discrimination in finance funding to the dealers, and the dealers are pushing back, obviously.”

But, he added, dealers are not “going to make two or three points” in dealer reserve anymore. “You’re going to make a flat fee,” he said.

Dealer reserve is the share of the customer’s interest rate that the lender pays the dealership for negotiating the finance contract. Dealerships set the amount of the reserve. Dealer reserve is usually capped at 2 or 3 percentage points. However, it can vary from customer to customer, even for customers who have similar credit histories.

The Consumer Financial Protection Bureau is pressuring lending institutions to stop allowing dealerships to set their own reserve amounts. The CFPB maintains that dealer discretion sometimes leads to higher rates for legally protected groups like minorities. That so-called disparate impact amounts to illegal discrimination, even when it's unintentional, the CFPB says.

Dorfman said it is critical for dealers to start to focus their F&I operations more on selling products and to rely less on a high finance reserve.

Granted, Dorfman has an agenda because his company sells F&I products to dealers. But he also has a point. If dealers are earning half of their F&I revenue per vehicle from a finance reserve, it is going to be a sock to the gut to have to take a flat fee.

“There are plenty of dealers who are doing $1,100 or $1,200 or $1,300 per car who are doing it with under 40 percent of that coming from the reserve,” Dorfman said. “Long term, I think it’s going to end up closer to 20 percent reserve with some of these flats.”

Dorfman recommends going to a one-price F&I strategy now to lessen reliance on a finance reserve.

“Especially on service contracts, price every contract on the same car, same term and the same mileage with the same deductible for the same price,” Dorfman said.

That way the price only moves if there are changes to the deductible, term, coverage or mileage. Those are logical changes, not discriminatory. He said the same idea can apply to all F&I products.

“Where some people think you might lose money by one pricing, you actually gain money because of consistent pricing,” Dorfman said. “Dealers end up with more opportunities, happier customers and a better overall experience.”

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