A look back at 5 F&I trends we watched in 2016
Our crystal ball proved pretty clear
Last December, we pointed out five F&I trends to watch in 2016. Two were tied to regulation. The others touched on digital F&I, lengthening loan terms and creditworthiness. Here’s a look at how each trend fared this year.
1. Continued regulatory pressure on captives, other lenders
The Consumer Financial Protection Bureau and U.S. Department of Justice settled with Toyota’s captive finance unit in 2016, but even so, lenders took a positive approach to working with the CFPB.
In February, Toyota Motor Credit Corp. agreed to pay up to $21.9 million and limit its retail margins on auto loans to settle Justice Department and CFPB allegations that it overcharged minority borrowers for their loans. The captive agreed to cap the retail margin dealers make on loans at 1.25 percentage points for contracts of 60 months or fewer and at 1 percentage point for contracts longer than 60 months.
Toyota Motor Credit said in a statement it denies any wrongdoing. It was the second captive finance arm to settle with the CFPB and Justice Department for overcharging minority customers for auto loans. American Honda Finance Corp. settled in 2015, agreeing to pay $24 million to potentially affected borrowers and to implementing the same loan caps as Toyota Motor Credit. The CFPB and Justice Department also settled with Fifth Third in 2015 and Ally Financial in 2013.
Lenders’ tones regarding the CFPB shifted this year. At the American Financial Services Association’s vehicle finance conference in March, industry insiders said pressure from the CFPB could drive the auto finance industry to be better.
2. Political opposition to CFPB
Two more bills seeking to limit the Consumer Financial Protection Bureau’s auto lending guidance have come to the surface this year, along with a challenge to the bureau’s structure.
In 2015, H.R. 1737, or the Reforming CFPB Indirect Auto Financing Guidance Act, passed the House of Representatives by a wide margin, 332-96.
Its companion bill, S.2663, was introduced in the Senate in March 2016 and referred to the Committee on Banking, Housing and Urban Affairs.
In September, the Financial Choice Act, H.R. 5983, passed the House Financial Services Committee. It aims to end bailouts for big banks, toughen penalties for wrongdoing on Wall Street, promote economic growth and provide regulatory relief for small community banks and credit unions, the committee said in a statement.
But in addition, like H.R. 1737 and S.2663, the Financial Choice Act would limit the CFPB’s 2013 auto lending guidance.
The structure of the CFPB and the existence of parts of the Dodd-Frank Act, which established the CFPB, have also been hot topics this year.
In October, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the structure of the CFPB was unconstitutional. Under the ruling, the president will have the power to supervise and direct the CFPB director and to remove him or her at will. The previous CFPB structure allowed the director to be autonomous and fired by the president only for cause.
The court’s decision says the CFPB can continue to operate as an agency, but it must operate as an executive agency like other executive agencies that are headed by a single individual, such as the Department of Justice or Department of the Treasury.
3. F&I goes digital
F&I hasn’t gone completely digital yet, but some companies have said they are close.
Buying a car is far more complicated than most purchases. Many companies have put the shopping process online, but financing still has to be done in person.
Fiat Chrysler Automobiles and Hyundai Motor America said they would offer an online car-buying experience. FCA’s program is a partnership with Amazon, limited to Italy. Hyundai’s program covers only the 2017 Ioniq EV. So both programs are on a smaller scale, and in both cases, customers have to arrange financing at the dealership.
More vendors with leasing and financing smartphone apps have also made announcements this year. AutoGravity launched an app in December that connects customers to a franchised dealership and a lender. Through the app, customers select a car and a dealership. They then are presented with up to four lenders that the dealership has relationships with. Customers plan terms and get approved through the app, then go to the dealership to buy F&I products and take delivery of the vehicle.
In November, Honcker, an app that that enables consumers to lease a new vehicle without entering a showroom, officially launched. Honcker sends lease offers to consumers after a soft credit check that’s based on information such as name and address that is provided upon registration to the app, said Nathan Hecht, CEO of Honcker Inc. Once the deal is made, dealership staffers can deliver the vehicles to customers and have them sign the paperwork.
So the online transaction is making headway, but for the most part, the financing piece is still face to face.
4. Loan terms continue to lengthen
As transaction prices climb and loan amounts expand, borrowers have been stretching out their term. The average new-vehicle loan term was 68 months through the first three quarters of the year, according to Experian. That’s one month longer than the year earlier. Terms for used-vehicle loans originated at franchised dealerships were 66 months through the first three quarters, up one month from the year earlier.
“It usually takes about a year to uptick,” Melinda Zabritski, Experian’s senior director of automotive finance, said in March.
“The continued rise in new-vehicle costs have kept many consumers exploring options to keep their monthly payments affordable,” Zabritski said in June. Some customers take out long-term loans to keep payments low, while others look to leasing.
5. More consumers are eligible for auto loans
In the third quarter, 79.3 million consumers had an auto loan, a 6.2 percent rise from 74.7 million a year earlier, according to TransUnion. The average balance per consumer was $18,361, the highest level since the third quarter of 2009 and 2.3 percent higher than the year earlier.
About two-thirds of auto and mortgage lenders and credit card companies surveyed by TransUnion said alternative data had helped them reach more creditworthy consumers, TransUnion said in February.
Alternative data can include, among other things, property, tax and deed records; debit and checking account information; and payday lending information.
“Auto is really the leader because the underwriting process is robust in terms of all the data they ask for,” said Mike Mondelli, TransUnion’s senior vice president of alternative data services. “As I think about larger participants in [the auto lending] space, I can’t think of one who’s not doing something with alternative data.”
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