As 2014 gets under way, here are five F&I trends that experts say merit watching in the months ahead, dominated by the difficult regulatory environment.
1. Dealer reserve under fire. The Consumer Financial Protection Bureau is making it harder for lenders to stick with the status quo on dealer reserve. While lenders are voluntarily capping interest rates, they still allow dealerships to add a bit to the buy rates on consumer loans as compensation for negotiating the loans. That could change in 2014.
Last year, in response to CFPB pressure, many lenders began scrutinizing finance contracts originated at dealerships for any disparities in dealer reserve that fall on legally protected classes of borrowers, such as minorities or women.
The CFPB ratcheted up the pressure in December with a consent order in which Ally Financial Inc. settled accusations of discrimination for $98 million. Ally said it accepted the order even though it disagreed with the conclusion that its dealers had committed any "measurable" discrimination.
The consent order says Ally may submit what the CFPB calls a "Non-discretionary Dealer Compensation Plan" -- that is, a plan for dealer compensation that takes discretion away from dealers for setting dealer reserve or other forms of dealer compensation. The CFPB has said it is open to suggestions. It also has proposed alternatives, including flat fees or a fixed percent of the amount financed.
2. F&I products face scrutiny. Some experts expect the CFPB to return its attention to F&I products this year. In June 2013, the CFPB, in another consent order, ordered Minneapolis-based U.S. Bank and Dealers' Financial Services of Lexington, Ky., to refund a total of $6.5 million to military service members who got auto loans 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.
The consent order was confined to marketing and disclosures about F&I products; it was not about the products themselves. In 2014 the CFPB potentially could dig deeper into the substance of the products themselves, says Dan Doman, general counsel for RouteOne in Farmington Hills, Mich.
"The CFPB in 2014 will be focusing on the value of the product," he said in a phone interview last month. "All of us can think of products dealers sell that have dubious value to the consumer."
At an F&I industry conference last fall, a panel of F&I administrators said they're worried regulators don't appreciate the customer benefits of aftermarket F&I products. An attorney whose firm represents three closely related trade groups -- the Service Contract Industry Council, the Guaranteed Asset Protection Alliance and the Motor Vehicle Ancillary Products Association -- said separately the groups were working on an approach to the CFPB, but he wouldn't discuss details.
3. Training and more training. Lenders, dealers and F&I administrators all see F&I training as a way to protect themselves against potential problems with the CFPB and other regulators as well as a way to boost sales.
Public retailers Group 1 Automotive, Lithia Motors and Asbury Automotive Group all said in their third-quarter reports they are emphasizing F&I training.
That goes for lenders, too. The National Automotive Finance Association, a trade group for subprime auto lenders based in Hanover, Md., said in November it had launched a certification program for lender employees who monitor compliance with state and federal regulations, including dealership compliance.
4. E-contracting surge. Several captive finance companies said in 2013 they experienced big increases in electronic contracting. Other captives and some banks said they were rolling out e-contracting as well. Those signs indicate e-contracting may finally reach critical mass.
RouteOne says it more than doubled e-contracting volume in the first half of 2013 and expects to pass more than 500,000 e-contracts for all of 2013.
Mike Groff, CEO of Toyota Financial Services, said in September that historically several factors have held back industrywide adoption of e-contracting, including: costs for dealers and lenders to develop processes, especially during the recession; ease of use and integration with multiple computerized systems; lack of e-contracts for leases at some lenders; and lack of electronic documents related to the sale other than the finance contract.
All those factors improved in 2013, setting the stage for further increases this year.
5. More subprime growth. During the downturn, auto lenders pulled away from subprime financing first, especially deep subprime loans. While subprime auto loans have increased in the past few years, they still haven't reached prerecession levels.
Subprime loans accounted for 36 percent of outstanding auto loans in the third quarter of 2013, down from 39.2 in the same period of 2009 during the downturn, Experian Automotive data show. The deep subprime category, with credit scores below 550, accounted for virtually the entire difference, the data show.
Peter Turek, automotive vice president for TransUnion's financial services business unit, said last month the numbers indicate subprime still has plenty of room to grow to reach prerecession levels. He said he expects delinquencies to increase in 2014 from below-average levels as subprime borrowers "take a bigger part of the overall auto loan pie."