Fixed dealership compensation for arranging auto loans likely will gain traction in 2015, predicts John Stephens, senior vice president of dealer services at EFG Cos., a major F&I administrator.
The Consumer Financial Protection Bureau is pushing auto lenders to switch from dealer reserve -- a compensation method that allows dealerships to set their own pay -- to a form of nondiscretionary compensation, such as a fixed dollar amount (flat fee) for each loan arranged or a fixed percent of the amount financed.
Dealer reserve is an amount of interest that lenders allow dealerships to add to the buy rate on a consumer auto loan. Dealerships typically choose the amount from a range provided by the lender, thus dealer reserve can vary from customer to customer. The CFPB maintains that differing amounts for dealer reserve can result in legally protected groups, such as minorities, paying higher amounts of interest than other similarly situated borrowers.
Dealer reserve is usually capped at 2 or 3 percentage points, depending on the length of the loan. The CFPB said in September that a lower ceiling on dealer reserve of 1 percent or less reduces the risk of discrimination.
So far, only one sizable auto lender, BMO Harris Bank, of Chicago, has switched from dealer reserve to nondiscretionary compensation. In April the bank began paying dealerships 3 percent of the amount financed, up to a maximum of $2,000, for contracts of 36 months or longer. The bank offers shorter loans but doesn’t pay dealerships a fee for those.
Alongside greater use of fixed compensation, Stephens has other dealership predictions for 2015. In a written statement, he said he expects dealerships to put more emphasis on F&I product sales, on customer retention and satisfaction scores and on sales of certified pre-owned cars and trucks.
EFG Cos. of Irving, Texas, near Dallas, provides products and services to both franchised and independent dealerships. Its F&I products include extended service contracts, prepaid maintenance, GAP, appearance protection, tire-and-wheel and “walkaway” vehicle return protection, the program behind the Hyundai Assurance plan. Walkaway protection allows customers to turn in their vehicle under certain circumstances -- notably, if they lose their job. EFG also offers dealerships training, consulting, and recruiting services.
Stephens outlined his expectations for 2015 in a phone interview with Automotive News Special Correspondent Jim Henry.
Q. Fixed dealership compensation doesn’t seem to have much traction. Why do you think nondiscretionary payment methods will increase in 2015?
I think the jury is still out. I haven’t heard anything definitive that this is absolutely the next wave, that this is how everybody is going to go, but I talk to a lot of people and I have heard from at least one manufacturer -- I can’t tell you who it is -- they are going to a flat rate [that is, nondiscretionary compensation]. They’re telling us “Be ready for it.”
I definitely believe the dealers need to be prepared for it.
The CFPB in a document last year pretty much endorsed lower ceilings on dealer reserve. Do you think lenders will move to lower ceilings instead of fixed dollar amounts for arranging loans?
I don’t know what the magic is about 1 percent. I don’t know why 1 percent all of a sudden makes it fair and equitable.
Say it’s 1 percent on a $40,000 loan. The CFPB is going to think that’s not too bad if you get to 1 percent. But you have to figure: How much longer would it be before they decide “That worked pretty well at 1 percent. What if we did one-half percent?”
What about Chrysler Capital lowering its ceiling to 1.75 percent, effective Oct. 1?
They did bring it down some, not all the way to 1 percent. The feedback I get is even though they may be less than the rest -- 1.75 percent vs. 2 percent in a lot of cases -- the feedback I get is that Chrysler Capital is still the primary lender for Dodge-Chrysler-Jeep, so it doesn’t seem to have hurt them very much.
The CFPB says forms of compensation other than fixed dollar amounts are OK. Do you think lenders are looking at alternatives?
We may see flat rates, or we may see them going to paying a percent of the amount financed, or we may see them paying a greater advance [that is, lending higher amounts relative to the value of a given vehicle].
There are lenders out there paying 4.5 percent of the amount financed for certain customers.
The National Automobile Dealers Association says that compensating dealerships with fixed dollar amounts won’t eliminate dealership discretion because retailers would still go to the lender that pays them the most. Do you agree?
From the dealership F&I mindset, they look at percent payout as to who gets that business. Even though they may go to flat rates, the feedback I get from dealerships is that the flat rate is the last of their concerns as long as the customer gets a great rate and the dealership is compensated well.
The lenders are not going to tell them “Here’s a $50 flat rate, now send us all your business.” At some point we’ll find out what that number is. The lenders will determine what that number needs to be.
A lot of dealership groups say they are relying on F&I products to make up for lower dealer reserve. But isn’t there danger that F&I products are next on the CFPB’s agenda?
I hear the same thing in the marketplace -- that regulators are thinking “First rate spread, then the next thing we’re looking at is products and eliminating abusive practices.” Eventually, I think you’ll see the products being sold will also be looked at. I think the result is going to be that customers will have a greater understanding about what’s being offered.
You’re correct that they are looking at reserve today and they will be looking at products. But even though they look at products, I think dealers can stay ahead of the curve, the ones that are doing a better job of training their people.
Are you getting more demand for training?
We are. We want dealerships to get really good, for instance, at following up with prospects that didn’t buy. What I also hear from dealers is “I need to make sure we’re training on compliance. I need to make sure we’re doing things the right way.” That’s the request we’re getting more and more often.
We also hear: “When we hire somebody we need to make sure they have full knowledge of each and every product and how this or that product fits the customer’s driving habits.” We have a lot of requests from the F&I space on how to do that effectively.
Some of the public dealership groups say they’re going to a shorter menu of what they call value-added products. Is that where all retailers are heading?
You have to get really good at learning what the customer’s driving habits are, the risk level they’re comfortable with, and then provide the right information to the customer.
Customers benefit from these products. If a car breaks today, the labor is no longer $75 or $80 [per hour], it’s over $100. And if something breaks, it’s no longer so easily fixed. I believe the happiest customers are the ones who take advantage of a service contract.