A look back at 5 F&I trends to watch in 2015
Last December, we pointed out five F&I trends to watch in 2015. Here’s a look at how each fared this year.
1. Political pushback on the Consumer Financial Protection Bureau. Legislators and national dealer and lender trade groups came after the CFPB this year with guns blazing.
In April a bipartisan bill was introduced in the U.S. House of Representatives that would significantly limit the CFPB’s guidance over auto lending. It passed the House in November with a vote of 332-96 and has since moved to the Senate for consideration.
Among other things, the bill, if it were to become law, would revoke the CFPB’s 2013 auto lending guidance bulletin, which recommended that auto lenders impose “controls on dealer markups” or eliminate “dealer discretion to mark up buy rates” on auto loans and compensate dealers instead using another method that “does not result in discrimination.”
“Dealer markup” is the CFPB’s term for the retail margin, or dealer reserve, lenders allow dealerships to take for arranging an auto loan. The CFPB has said dealerships’ ability to adjust their reserve on consumer auto loans case by case has resulted in minorities paying higher interest rates than other borrowers. That adverse effect, or disparate impact, amounts to illegal discrimination, the bureau says.
In June, the U.S. Supreme Court held that disparate-impact claims are recognizable under the Fair Housing Act, which may lend credence to those types of claims in relation to auto lending.
National dealer associations have also pushed back against the CFPB this year. In July, the National Automobile Dealers Association filed a Freedom of Information Act request asking the CFPB to make public a bureau memo that purportedly undermines the bureau’s claim that it’s not targeting dealers through enforcement actions. American Banker announced the existence of the memo in June and that it had a copy.
According to the paper, the memo, sent by three senior CFPB officials to CFPB Director Richard Cordray, showed how the then-proposed settlement with American Honda Finance Corp. would further the bureau’s “goal” of “limiting dealer discretion.” The CFPB’s FOIA manager rejected NADA’s request, saying the memo was privileged.
In October, NADA filed another FOIA request, asking the CFPB for additional documents leaked to American Banker in September. This time NADA sought the documents because it believed they would show that the CFPB ignored evidence that its method for determining racial bias in auto lending was flawed. NADA also believed the documents would prove that the CFPB intends to regulate the auto finance market through enforcement action. The CFPB rejected the second FOIA request later that month.
Also this year, the American Financial Services Association and other trade associations sent a letter to Cordray asking him to publicly respond to a study AFSA released in November 2014. When AFSA released the study, which concluded that the CFPB’s methodology for determining race was flawed, the bureau said it would “review it carefully.” The request for a response, sent in February, was also signed by the American Bankers Association, Consumer Bankers Association, Financial Services Roundtable and the U.S. Chamber of Commerce.
Meanwhile, no action was taken this year on a bill proposed in Congress in 2014 that would replace the position of director of the CFPB with a five-member commission appointed by the president.
2. Stricter limits on dealer reserve. The CFPB claims it has found minority loan pricing disparities attributable to dealer reserve in the portfolios of some big auto lenders. This year, two of them, American Honda Finance Corp., and Fifth Third Bancorp, agreed to limit dealer reserve to 1.25 percentage points for loans of 60 months or fewer and to 1 percentage point for loans longer than 60 months as part of their settlements with the CFPB and U.S. Department of Justice. As a result, they were not assessed civil penalties.
For Honda Finance, the government-mandated limits didn’t change much. It already had a cap of 2.25 percentage points for loan periods of 60 months or fewer, a Honda spokesman said. So the new cap trims that by one point. For terms greater than 60 months, though, there was no change. Honda Finance’s cap before and after the settlement was 1 percentage point.
The federal agencies also included a nondiscretionary compensation option in the order, but the agencies and Honda Finance have not disclosed details. Depending on the amount of nondiscretionary compensation, dealers could actually increase their profits.
NADA and the American International Automobile Dealers Association criticized the terms of the American Honda settlement while AutoNation CEO Mike Jackson called it a “workable template” for the industry.
Ally Financial, in a settlement announced in late 2013, did not agree to change its dealer reserve policy. It was assessed $18 million in civil penalties. All three companies denied discrimination.
The CFPB is also investigating Toyota Financial Services and Nissan Motor Acceptance Corp. for unintentional discrimination, according to documents obtained by American Banker in June. The outcome of those probes likely will be announced next year. So far Toyota Financial Services has said it has no plans to change its use of dealer reserve.
3. Lenders remain abundant. This trend appears to have held in 2015, judging by RouteOne’s results, and likely will again in 2016, thanks to forecasts for a strong auto market.
RouteOne’s average lender relationships per dealership have remained steady, hovering around 12, for the past two years, the company said. In 2015, the average was just over 12, compared to 2014 when it was just under 13.
About 150 new finance sources signed for credit applications with RouteOne and 10 new finance sources signed for e-contracting during 2015, which shows “a strong continued interest among lenders in doing business with dealers,” Todd Mason, RouteOne’s chief product and marketing officer, told Automotive News.
Overall, the market is supporting more dealer-lender relationships.
TrueCar this week forecast auto sales will reach an all-time high of 17.5 million vehicles in 2015 and 18 million in 2016.
And in August, U.S. auto loan and lease balances surpassed $1 trillion for the first time, according to Equifax National Consumer Credit Trends Report.
With larger loan balances, consumers have also lengthenedloan terms. New-vehicle loan terms reached 67 months on average in the third quarter, while used vehicle terms averaged 63 months, according to Experian Automotive.
Also, TransUnion projects that the 60-day delinquency rate will fall in the fourth quarter of this year to 1.11 percent, from 1.16 percent in fourth quarter of 2014. The company expects the 60-day rate to be 1.11 percent in the fourth quarter of 2016, too.
4. Captives step up oversight. Captive finance companies and other auto lenders are monitoring the loans dealerships originate more closely now that the CFPB’s larger participant rule has taken effect.
In June, the CFPB published a rule that allows it to supervise larger nonbank auto finance companies, such as automakers’ captive finance companies. The rule extends the CFPB’s supervision to any nonbank lender that makes 10,000 or more loans or leases annually. Those lenders are considered “larger participants.”
The rule, which was proposed in September 2014, allows the bureau to oversee lenders’ activity based on the Equal Credit Opportunity Act, the Truth in Lending Act, the Consumer Leasing Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition on unfair, deceptive or abusive acts or practices.
The CFPB now has supervision over 34 of the largest nonbank auto lenders. The lenders originate about 90 percent of nonbank auto loans and leases, the CFPB says.
The 20 biggest-volume lenders by auto loan originations in the third quarter of 2015 accounted for 75.9 percent of new-vehicle loans, according to Experian Automotive. Of the top 20 new-vehicle lenders, nine were captive finance companies. Ford Motor Credit was the top new-vehicle lender, with a loan share of 10.04 percent.
The CFPB settled with captive American Honda Finance for discriminatory lending practices a month after the rule was published. Honda Finance admitted no wrongdoing. But the settlement requires it to improve its monitoring and compliance systems. It also “allows the lender to experiment with different approaches toward lessening discrimination and requires it to regularly report to the department and the CFPB on the results of its efforts,” the federal agencies said in a July statement.
5. Growing push to shorten F&I transaction times. This year, the industry maintained its focus on shorting F&I transaction times, but it didn’t reach last year’s goal of 30 minutes or less. Sonic’s One Sonic-One Experience program got close. It made the total transaction faster, cutting closing times to about 45 minutes.
Other than that, there have been incremental strides in shortening the time buyers spend in the F&I department.
One way the industry is trying to make the F&I process more efficient is by increasing electronic contracting volume.
JM&A Group expects its e-contracting penetration to reach 60 percent of all contract volume by the end of 2016. Through October, 32 percent of JM&A’s contracts were electronic. But for all of 2014, only 12 percent were, and in 2013, JM&A did no e-contracting, Forrest Heathcott, president of JM&A Group, said during a visit to Automotive News in November.
“Dealers are very ready to adopt e-contracting,” Heathcott said. “It’s not as easy as it looks. It requires a good bit of work on both sides, both the pitching side and the catching side.
“But once the dealers get the equipment they need and the training they need, they love it. And the consumers love it as well.”
Plus, he said, “The accuracy is much better with e-contracting. It doesn’t require as many re-contracts and re-dos.” That not only saves retailers, lenders and customers time, it also helps dealers get funded faster.
Dealerships are also shortening F&I time by checking critical consumer information, such as credit scores, earlier in the buying process.
For example, 700Credit’s web platform prescreens customers without asking for sensitive information, such as Social Security number or birth date.
With the prescreen, dealerships can use the customer’s name and address to get a credit score in what’s considered a “soft pull,” which doesn’t affect the customer’s credit profile.
CreditMiner also offers real time access to the credit bureaus and gives exact scores for both a hard and soft pull.
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