Dealerships better brace themselves for a much higher level of scrutiny by auto lenders now that the Consumer Financial Protection Bureau has the lenders under a microscope, F&I experts say.
Lender scrutiny could put dealers under the microscope
"I think it's a matter of when, not if" dealerships start experiencing much closer monitoring, Jim Landy, CEO of subprime lender CarFinance Capital, said this week. "At the lender level, there is tremendous energy being devoted to making use of efficient monitoring."
The CFPB put auto lenders on notice this year that it would hold lenders accountable if it finds that pricing differences at dealerships result in discrimination against minorities or other legally protected classes. Dealer groups deny discriminating, but lenders are going over dealership loan portfolios with a fine-toothed comb, experts say.
The CFPB said lenders create opportunities for discrimination when they allow dealerships to add to the interest rate on a customer's loan as compensation for arranging the loan. Instead, the CFPB suggests lenders switch to flat fees.
But auto lenders fear they'll lose share if they're the first to switch to flat fees, said Jeff Levine, a partner with Hudson Cook law firm of Hanover, Md. They anticipate that dealers will switch to lenders that allow the heftier dealer reserve.
"From the lender side, where I just came from, moving to a flat fee is considered damaging to dealer relationships and damaging for volume," he said.
Levine, based in New York, is a former general counsel for Chase Auto Finance, one of the nation's biggest auto lenders. Levine's comments were made during last week's Automotive News F&I Week webinars.
(To hear a replay, go to fandiweek.com)
The CFPB says it is examining dealership-negotiated loans, looking for price differences that could result in protected classes paying more.
One way dealerships can eliminate, or at least reduce, price differences is to adopt fixed prices for dealer reserve and for F&I products such as extended-service contracts, with well-defined exceptions for occasional discounts, experts say.
Paul Metrey, the National Automobile Dealer Association's chief regulatory counsel for financial services, privacy and tax, said NADA doesn't have an official position on fixed pricing. "We recognize it as a proactive measure in terms of compliance, but dealers need to talk to their attorneys whether it's something to adopt and how they would go about it," he said.
Metrey said NADA has grave concerns that if the CFPB does away with dealer discretion to set prices, it could have the unintended consequence of making pricing less competitive and therefore more expensive for customers.
Some big dealership groups already employ fixed pricing, in some cases implementing standards long before the CFPB was on the scene.
"For years, we've had a very transparent menu," said Pete DeLongchamps, vice president of financial services and manufacturer relations at Group 1 Automotive.
"We certainly have price caps and rate caps on all our products. A big part of what we are selling to customers is that it's fairly priced."
The group's dealership management system won't allow dealership F&I managers to enter a value on a contract that exceeds the prescribed limit, he said last week. "It's a hard cap. It won't print the contract if you go over it." He said the company spends a lot of time and effort reviewing contracts to make sure they meet standards.
Group 1 ranks fourth on the Automotive News list of the top 125 U.S. dealership groups with 128,550 new vehicles sold at retail in 2012.
Chris Holzshu, CFO for Lithia Motors Inc., said his group has rate caps on dealer reserve. He said Lithia has had fixed pricing on all F&I products for 15 years.
"As you know, the CFPB does not have jurisdiction over auto dealers," Holzshu wrote in an e-mail last week. "So we are looking to our major lenders for guidance on future direction and compliance, as ultimately we want to stay in sync with their programs."
Lithia ranks ninth on Automotive News' list of the top U.S. dealership groups with 56,960 new vehicles sold at retail last year.
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