Many shifts in the automotive finance space that occurred in 2018 will carry over to this year. Developments around affordability, regulation and dealership technology, for example, likely will continue. Here are some updates to watch for.
Pressure from rising rates. The Federal Reserve lifted the benchmark interest rate four times in 2018 and plans to lift it two more times in 2019. Rising rates already are impacting vehicle financing and leasing, causing some consumers' monthly payments to lift hundreds of dollars compared with 2017. Automakers, faced with steel and aluminum tariffs and the threat of additional tariffs, have pulled back on the incentives that often limit the pressure of rising rates on franchised dealers and their customers.
Increase in used-vehicle financing. The glut of off-lease vehicles coming back to the market will help satisfy the growing demand for small, affordable vehicles consumers may struggle to find on the new-vehicle side. Increased investments in certified pre-owned programs, a stronger focus on service departments and an emphasis on F&I could be the keys to dealer profitability this year.
Military Lending Act guidance. After the Department of Defense issued an updated interpretation of the Military Lending Act, dealers have questioned when, and if, the guidance would be overturned. The confusion resulting from the update — which put restrictions on dealerships selling GAP to service members and their families — prompted many dealers to stop selling the product to those individuals. A decision on whether the interpretation will be reversed could happen in 2019.
Increased vendor integrations. In 2018, many vendors came forward with plans to better integrate software solutions for dealership management systems. For example, CarGurus announced it would feature its data on other vendor sites, and more vendors signed on to CDK Global's Fortellis platform, a digital marketplace where dealers can purchase and connect different software programs. More integration of software, including solutions used in the F&I office, could mean fewer headaches and more savings for dealers.
Regulatory landscape shifts. Democrats took control of the U.S. House of Representatives following November's midterm elections, which poised ranking member Maxine Waters, D-Calif., to lead the House Financial Services Committee. While it is unlikely that Waters can bring back the Consumer Financial Protection Bureau's 2013 auto lending guidance that aimed to limit dealer reserve on auto loans, she likely will favor increased oversight on automotive finance regulation. Still, Kathy Kraninger, who began leading the CFPB last month, likely will follow her predecessor, Mick Mulvaney, in limiting the bureau's focus on auto finance.