Facing down the prospect of dwindling reserve

Shrinking finance reserve means dealers will have to make F&I product sales even more of a priority to maintain profitability, but many of them are likely prepared.

Last week, BB&T Dealer Finance told retailers it was adjusting its standard on dealer reserve: the retail margin included in the customer's price for an auto loan to cover the dealer's cost in arranging it. The bank had amended its dealer reserve policy to a 3 percentage-point flat fee in 2015. In March, it will revert to the traditional dealer reserve model, in which dealers can adjust the margin, but they must keep it at or below 2 percentage points.

Many dealers already have an F&I profit mix of 70 to 75 percent products and 25 to 30 percent reserve.

That's compared with the 50-50 model many of them had before the Consumer Financial Protection Bureau began cracking down on auto lenders for potentially discriminatory lending practices in 2013.

When the CFPB sued American Honda Finance Corp. in 2015 and Toyota Motor Credit in 2016, it capped dealer reserve at 1.25 percentage points for loans of 60 months or fewer and at 1 percentage point for loans longer than 60 months.

Many stores placed a greater focus on F&I product sales and a lesser focus on reserve a few years ago to prepare for a future with little dealer compensation.

Plus, many stores value F&I product sales more than a one-time reserve because the products come with more lasting benefits, such as protection on customers' vehicles and customer retention in the service lane.

With a drive to sell F&I products and with lenders implementing stricter limits on margin, dwindling reserve doesn't seem as far-fetched as it did a few years ago. The difference now? Dealers are prepared.

You can reach Hannah Lutz at hlutz@crain.com -- Follow Hannah on Twitter: @hm_lutz

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