Some dealers prep for flat fees

Dealer Mike Thompson has spent about $200,000 over the past two years on additional training for his finance and insurance managers.

He wants them to sell more extended service contracts, tire-and-wheel policies and other F&I products so his dealership group can rely less on finance reserves from auto loans to support F&I revenue.

"I've known for the last 20 years, in the depth of my heart, that the days of the big finance reserve would go away. You have to be prepared," said Thompson, CEO of Montrose Auto Group in Akron, Ohio. Montrose owns 10 dealerships selling 17 brands in Ohio and Pennsylvania.

Thompson's fear that he could soon lose the ability to make a healthy profit from finance reserves is well-founded. The Consumer Financial Protection Bureau has been pressuring auto lenders for the past few years to stop allowing dealerships to set their own reserve amounts. Some F&I experts predict those pressures will result in most lenders adopting a flat fee structure to pay dealerships.

Some dealers, like Thompson, are preparing for the possibility of flat fees by giving employees extra training in selling F&I products. But most aren't, F&I insiders say. Only about one in five dealerships nationwide have boosted F&I product sales training in the past two years, they say.

"There is no doubt that all dealerships should be having training done now to teach more product and value [and] less rate so that when the real changes come they don't drop significantly, or at all, in F&I income," said Larry Dorfman, CEO of F&I product provider EasyCare.

The finance reserve, also called dealer reserve or dealer markup, is the share of a car buyer's interest rate that the dealership earns for arranging the loan. The dealership typically sets the amount -- usually capped at 2 or 3 percentage points -- which the lender pays in a lump sum. Many dealerships make a substantial portion of their F&I profit from dealer reserve.

The CFPB holds that the lenders' practice of allowing dealerships to charge customers varying rates of reserve results in minorities and other protected groups paying higher interest rates on auto loans than other borrowers. That so-called disparate impact amounts to illegal discrimination, even when it's unintentional, the CFPB says. The bureau has taken actions against some lenders, including Ally Financial Inc., which in 2013 agreed to pay $98 million in consumer restitution and civil penalties. Ally said at the time it did not agree with the CFPB's finding that dealers had discriminated.

Dorfman said car dealers will always be compensated for securing loans. But he said, "We know the caps on reserve rates that can be made are already being put in place and that they will continue to shrink. Many, including myself, believe these differences between buy and sell rate will become flat-rate commissions paid by the finance sources to the dealers for setting up the financing for the customer." These fees are likely to be $200 to $400, and "maybe a little more," he said.

That's a far cry from what dealerships presently make. The average dealer reserve is $650 to $750. That can be even higher for luxury brands, said an F&I product expert who asked not to be named.

"Dealers are slow to recognize that [a flat fee] could potentially happen," that expert said. "They think even if it goes to a flat, the banks will be competing with each other so much that the flat wouldn't be much of a discount to where they're at now."

He said most dealers are "not prepared" for the banks to take their flat fee to a rate well below $650.

He said the dealers he works with are training their teams to focus more on product sales and less on finance reserve than they did two years ago, but their increased training is "negligible."

"It's a small amount when you consider the stakes that are at play here," he said. "Dealers are overestimating the lobbying and legal power of the National Automobile Dealers Association."

Some lenders he has talked with say that if the industry does go to a flat fee, it could be close to what dealerships presently make in dealer reserve, so a dealership's per-vehicle revenue might not be dramatically impacted.

"The banks are trying to figure out how to pacify the CFPB without hurting dealership profits," said the source.

Dealer Thompson does not want to leave it to chance.

"A couple of the bank reps have mentioned that there are changes coming, but nothing you can sink your teeth into," Thompson said. "Just innuendos, but you can read between the lines."

About 60 percent of the dealership group's $1,338 average F&I revenue per vehicle now comes from dealer reserve. By year end, his goal is to flip that. Thompson wants 65 percent of the group's per-vehicle revenue to be derived from F&I product sales. He also wants to raise the group's average F&I revenue per vehicle to $1,400.

His long-term goal is to derive 70 percent of F&I revenue from product sales and 30 percent from reserve, he said.

"We're training, we're training and then we're training," Thompson said. "That's the only way we're going to get there."

Thompson, whose dealership group sells about 14,400 new and used vehicles a year, has had a full-time sales and finance trainer on staff for 12 years. Because he sells F&I products from EasyCare, he also has worked with an Easy Care trainer regularly for 15 years. Both trainers have increased their frequency of training. "In the last two years we really made a major effort to work on upselling the products," Thompson said.

The EasyCare trainer used to instruct at Thompson's stores once every two months. "Now he's probably in my stores three times a month," Thompson said.

Thompson also has started monthly roundtable discussions at which the group's F&I managers and trainers review sales processes and identify best practices.

It's not unusual for large dealership groups to have an on-staff trainer or a vendor's trainer visit regularly, said Chip Maher, dealership management consultant for NADA's 20 Group Program in McLean, Va.

The dealers Maher works with are increasing the focus on training to emphasize a consistent process, more focus on selling F&I products and improving customer satisfaction scores, he said. One group told him if it could increase product sales by $200 to $350 per vehicle it would generate about $2.5 million more in annual revenue across its six stores, he said.

"It's all about training and processes," Maher said. "Offer 100 percent of the products to 100 percent of the customers 100 percent of the time. Training is important and product is important."

In Thompson's case, even losing $150 from his average F&I revenue per vehicle would "really hurt." That's why he continues to push training.

"I'm not as concerned as I was, say, three years ago when I jumped in with both feet to drive the product sales up," Thompson said. "Today, a flat fee would hurt a tiny bit, but not to the extent that it would hurt other people who are not making preparations."