Finance and insurance rates and practices came under attack in 2004, and it wouldn't surprise anyone if the subject becomes a hot topic at the National Automobile Dealers Assn.'s convention next month in New Orleans.

Unlike other recent hot potatoes like Ford's Blue Oval tiered-pricing system or the aborted buyouts of urban dealers by Ford and GM, the idea of imposing caps on vehicle loan markups potentially strikes directly at dealers' cash flow.

As a profit source, no department of the dealership is more reliable than F&I. With the squeeze on new-vehicle margins intensifying, especially from the U.S. Big Three, dealers have come to rely on F&I and parts and service as profits generators.

For that matter, so have the domestic auto makers. This last year, General Motors Acceptance Corp., Ford Credit and DaimlerChrysler Services have substantially outstripped the net profits of their parent companies in North America, paying big quarterly dividends to papa.

The windfalls from vehicle loans blew in trouble, however. Class-action settlements in federal courts on behalf of minority-group plaintiffs led to caps on vehicle loan markups of 2% to 3% by Big Three captive lenders, and several publicly owned dealer groups. These settlements were half to two-thirds of the previous rates. Multiply that out by loans issued over an extended time, and you wind up with a lot of lost income for both dealers and lenders.

What's more, dealer defendants and captive lenders were roasted by media stories, such as the ones on CBS's 60 Minutes and NBC's Dateline and by ex-F&I managers who conned customers, then, in denouncing their sins, blamed the dealerships. The fact that many of the plaintiffs were African-American and Hispanic-American didn't help. The dealer community got itself another case of alleged exploitation.

Responding to the assaults, documented in hundreds of pages of legal briefs, NADA and two state dealer associations took steps to clean up the mess. The pioneering Virginia Automobile Dealers Assn., which had waged the second “Battle of Richmond” when Ford fired its double-barrel pricing pistol as part of Blue Oval dealer certification, stitched together the first state licensing proposal for F&I managers.

The Virginia legislature will receive a formal bill early this year in what could become a nationwide movement if other state associations agree that F&I is a profession that should be licensed like veterinarians, pharmacists and insurance agents.

In New Orleans, where NADA members will gather to weigh the pros and cons of licensing and rate caps, Louisiana dealers will cite their success in enacting the nation's first measure capping vehicle loan rates at 2%-3% levels.

The Crescent state dealers acted promptly to codify the reduced rates. They thought that, if they waited, such a proposal would garner amendments like those proposed in California. Those legislative add-ons would have regulated certified car sales and required full cash refunds on “lemon” returns up to three days, neither provision having to do with rate caps.

California Gov. Arnold Schwarzenegger became a hero of sorts to dealers when he vetoed the legislation containing the rate caps and all the rest. He cited the bill's “vagueness.”

But he says he might sign a bill strictly setting rate caps if the 2005 session of the state's lawmakers sends him a less cluttered version.

NADA recommends that dealers fully disclose what rates are and that they are negotiable. But as for limiting amounts to fixed percentages, NADA Chairman Charley Smith says “free market” rules should prevail.

“Any customer can shop around for the best rates,” he says. “Legislation would not be fruitful.”

Lost income from capped rates can be offset elsewhere. Sid DeBoer, chairman and CEO of the Lithia Motors dealership chain, says, “As always, we'll make up for the setback by selling more F&I aftermarket products, like service contracts, prepaid maintenance policies and those new vehicle tracking systems.”

Lithia's 85 dealerships rolled up a record $1,044 per-vehicle F&I yield in the third quarter, despite rate caps.

Mac Gordon is the dean of U.S. automotive writers. He can be reached at