On April 14, I saw an NADA alert to dealers that made me stop and think “What if?” The subject of the alert was “Auto Financing May Be at Risk.”
My initial thought was “What are they talking about!?” Then I began to contemplate whether this was possible. Even though the idea of dealer-assisted financing going totally away seemed farfetched, the thought of it scared me a little. After all, I - like many of the AE readers - have invested my heart and soul into this business, not to mention a significant part of my personal worth.
After considering all the options of this legislature, which I will spell out for you in this article, I concluded that the headline “Auto Financing May Be at Risk” was certainly an alarmist way to look at the situation. However, to assume that life as we know it in “Finance and Insurance” will be the same is probably naïve.
NADA has followed up that headline with many more in the last couple months:
May 12: Financial Overhaul Pits Military Against Car Dealers
May 13: Auto Dealers Take Issue with Misleading Statements from White House on Finance Reform
May 20: Brownback Amendment is Pro-consumer and Keeps Auto Credit Affordable
May 25: Senate Sides with Auto Dealers
May 28: Obama Administration wants Auto Dealers Subject to New Oversight
June 2: Congressional Overhaul of Financial Regulation Is Down to the Wire
Where Are We Now?
The House of Representatives has created a bill that will exempt auto dealers from the equivalent of a Consumer Product Safety Commission. The Senate bill didn’t go that far but a majority of senators have voiced support for the exemption through the Brownback/Campbell bill.
In early June, negotiators from the Senate and House worked on merging the two versions of financial reform and both parties should vote to pass the bill. The Obama administration has come out forcefully against the dealer exemption and will try to affect the final outcome. So it’s safe to say F&I as we know it is certainly in the balance.
I am one that tries to focus on only things that I can control, so the outcome - although it seems to be in our favor - isn’t going to change much in my opinion.
Sure, we can and should assist the lobbying effort toward exempting car dealers, but I prefer to focus on the “What if?” What are the potential outcomes if dealers are exempted from the Financial Reform Agency? What if they are regulated under the new Consumer Product Safety Commission Agency?
What if Dealers Are Exempted from the Financial Reform?
There have been valid arguments on both sides about whether to include dealers in the financial reform bill. The armed forces argue that extra consumer protections are needed because dealers often employ high-pressure tactics to trap military families into expensive loans. Although to date they haven’t brought any examples forward, I’m sure they’ll be able to find enough of them to make this issue look larger than it is.
Deputy Communications Director Jen Psaki points out that auto dealer-lending represents an $850 billion industry, which is larger than the entire credit card industry and makes nearly 80 percent of the automobile loans in our country. This is why President Obama is staunchly against exempting dealers.
Others argue that this is simply a left-wing attempt to grab as much power while they have the chance. Many argue that dealers or “Main Street” did not cause the financial meltdown, but rather it was Wall Street and dealers shouldn’t be included in the bill. They further argue that the Federal Trade Commission already regulates dealers, so it’s not necessary to include them in the police powers of the new agency. They further claim that all it will do is make financing more expensive to customers.
At this point, it looks like dealers will be exempt. What does that mean to our industry? Is it business as usual? I doubt it. Some will read dealers being exempt as an opportunity to abuse customers even more than they had in the past. That is, to try and take advantage of customers who are poorly equipped in financial matters. We all know these dealers do exist, but they are a small minority.
I think it’s safe to say that our business will see this as an opportunity to self regulate, and lenders will move to limit reserves. Some will even move toward paying just flat dollar amounts per contract. They might even limit markups on aftermarket products.
I think you’ll see states step in and try to regulate how business is conducted in their states. We should expect the left-leaning states especially to move in this direction. Politicians need “causes” to perpetuate their existence and attacking the big bad dealer will certainly be a popular one.
What if the Consumer Product Safety Commission Agency Regulates Dealer-assisted Financing?
I don’t think we can rule out that we could be included in the financial reform bill. What if this happens? Does this stop dealer financing? Of course not!
As Psaki points out, dealers make nearly 80 percent of automobile loans. That is a distribution network that lenders count on. Lenders have evolved over the last 10 years to centralized lending. They simply don’t have the human resources capable of handling the demand for auto loans.
How will we be affected by the new agency? Will dealer reserves be limited? Probably.
Will markups on products be restricted? Maybe.
What is certain is that transparency will be enforced. Menu selling has already been defacto required in states like California with the Car Buyers Bill of Rights. I think we can expect either mandated flat reserve or a required disclosure of reserve point markups.
Will this help or hurt the independent agent or aftermarket product provider? How about the dealer? One could certainly argue that if a dealer is restricted on how much reserve he can make or how much he can mark up the products he sells, the result will be higher product sales.
Furthermore, I believe a more transparent process leads to not only a satisfied customer, but also to addition product sales for dealers and industry people. A clear example of this is how menu selling has revolutionized how we do business in the F&I office and dealers have never seen greater F&I profits.
Time to Make a Choice
I like to use the following example when it’s time to make a difficult choice. “Pretend someone put a gun to your head and said ‘pick one!’”
It is my preference that dealers are not included in the bill. I don’t like the fact that government wants to regulate further an industry that is already regulated by the Federal Trade Commission. We didn’t cause the problem, and indirect lending delinquencies have remained stable considering our unemployment rate.
Ed Tonklin, chairman of NADA, said it well: “Dealer-assisted financing - which is always optional - regularly affords consumers more favorable terms than those available through other sources.”
He’s right. F&I managers have many sources available to them to assist the customer with financing. This enables some customers to get financing when they otherwise might not have, and the system encourages the lenders to be competitive to get the customer and the dealer’s business.
In summary: if it’s not broken, don’t try to fix it!
