Here are five F&I trends to watch as we head into 2016.
1. Continued regulatory pressure on captives, other lenders
American Honda Finance Corp. settled with the Consumer Financial Protection Bureau and Department of Justice over charges of unintentional discrimination in 2015. In 2016, regulators could bring charges against more captive finance companies.
In June, the CFPB published the “larger participant rule,” giving it oversight of any nonbank lender, including automakers’ captive finance arms, that originates 10,000 or more auto loans or leases annually. The Honda Finance settlement came one month after the larger participant rule was published.
The CFPB now has supervision over 34 of the largest nonbank auto lenders, which, the bureau says, originate about 90 percent of nonbank auto loans and leases.
In addition to the Honda Finance settlement, the CFPB and the Department of Justice settled with Fifth Third Bancorp in 2015, and with Ally Financial in late 2013, for unintentional discrimination when setting retail margins on auto loans. All three denied the charges of discrimination.
According to proposed consent orders obtained by American Banker in June, the CFPB planned to cite Toyota and Nissan’s captives for unintentional discrimination, too.
The outcome of the CFPB’s investigations into Toyota Motor Credit Corp. and Nissan Motor Acceptance Corp. likely will be announced in 2016.
2. Political opposition to CFPB
In November, the U.S. House of Representatives overwhelmingly passed a bipartisan bill that would significantly limit the CFPB’s guidance over auto lending. In 2016, that bill could become law or be squashed, depending on the Senate and a potential decision by the president.
If the bill, called Reforming CFPB Indirect Auto Financing Guidance Act, became law, it 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.”
But the Senate’s vote may differ from the House’s, especially since Sen. Elizabeth Warren, D-Mass., headed the formation of the CFPB. Gerald Sachs, a former CFPB lawyer, said in August that he doesn’t think the bill will become a law under the current administration. The “CFPB will finish what they’ve started,” he said.
If the bill reaches President Barack Obama’s desk before he leaves office, he would likely veto it. If it doesn’t, its fate may depend on the result of the 2016 presidential election.
3. F&I goes digital
This year, there was a stronger push to digitize the F&I process, by introducing F&I products and approving loans online and utilizing electronic contracts inside the F&I office. Next year, that push will likely gain momentum.
A study this year by MakeMyDeal, a Cox Automotive company, found 83 percent of surveyed consumers were interested in learning about F&I before they visit the dealership.
Mike Burgiss, founder of MakeMyDeal, said putting more F&I information online will smooth the F&I manager’s job at the dealership. “It will be a more transparent and efficient process because education has already taken place” online, he said. Dealers would benefit because they would be in control of pricing the products and offering them in the way they want.
Electronic contracting has also gained traction this year, and it is expected to advance even further in 2016. Consider two examples of e-contracting’s expansion:
1. One of GM Financial’s goals for 2016 is increasing e-contracting, COO Kyle Birch told Automotive News in November.
GM has 4,300 dealers, Birch said. “It’s a little bigger ship to turn than a 500-dealer manufacturer. We have talked to GM quite a bit about it this year, and we’re trying to figure out how we can work it into programs for the dealers next year and get a better penetration,” he said.
2. Separately, 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 its contracts were electronic, a sharp jump from 12 percent in all of 2014 and zero in 2013.
The trend is clear. The only question is the speed.
4. Loan terms continue to lengthen
As vehicle prices and loan amounts grow, consumers have been stretching loan terms to manage monthly payments. That’s a trend that should last into 2016.
New-vehicle loan terms reached 67 months on average in the third quarter, while used-vehicle terms averaged 63 months, according to Experian. The longest set of loan terms Experian tracks -- 73 to 84 months -- increased for both new and used vehicles in the third quarter, the most recent for which data is available.
Is this cause for worry? No, say some. “A couple of months’ change in the extension of term does not … derail the industry or impute significant risk going into these transactions,” Michael Collins, senior vice president of F&I solutions at Dealertrack, said in June.
5. More consumers are eligible for auto loans
Auto lenders should continue to approve more consumers based on nontraditional ways to determine creditworthiness next year.
Alternative data -- beyond what the credit bureaus typically monitor -- can give dealers and lenders a fuller picture of consumers’ credit profiles, which may better position those consumers as reliable loan candidates. Such data can include property and tax records, debit accounts, payday lending information and even magazine subscriptions and cellphone bills.
Consumers often have thin credit files if they’ve recently entered the market, use credit infrequently, have no recent activity or have no open trades. Finding new ways to determine creditworthiness gives those consumers and others a chance to finance their vehicles, and it can give auto dealers additional business.