December columns often either recap prior-year events or predict the next year’s challenges. I’ve done both before, and I’m tired of the formula.
Instead, I want to discuss the auto-retailing industry’s ongoing burning issue: dealer reserve, the indirect-lending practice of dealers adding to a car loan’s rate as compensation for arranging it.
Two recent news items captured my attention.
- Senator Elizabeth Warren (D-MA) called for a carve-in of the carve-out agreed to when car dealers were exempted from regulatory oversight by the Consumer Financial Protection Bureau. She thinks they should be un-exempted.
- Consumer advocate Rosemary Shanahan announced a proposed California ballot initiative to further regulate and restrict car dealers.
Before she was Senator Warren, Elizabeth Warren was defacto director of a fledging CFPB. Many consider the agency as her baby.
During November congressional hearings on the lack of transparency of the agency that was created a few years ago to demand transparency of the financial markets, she said:
“The CFPB has authority over nearly every kind of consumer loan, but the big exception is car loans. The CFPB has done great work in this area, as best it can. But it makes no sense to me that there should be any exception here for consumers who are being tricked out of billions of dollars every year on car loans.”
If Senator Warren’s wish comes true, car dealers will have another regulatory agency to comply with, and the agency’s backdoor attacks on dealer reserve will start coming through the front door.
If Senator Warren can’t drive her desired change while in her current elected position, will her chance to drive change improve if one believes reports her next desired address is 1600 Pennsylvania Avenue?
Meanwhile, on the other side of the country, Shanahan’s Consumers for Auto Reliability and Safety is starting the process for the next statutory challenge to dealer reserve.
Keep in mind many regulations start in California and sweep east. The California Car Buyer’s Bill of Rights was one of the first state laws to specifically legislate against payment packing and legislate for what many today call a menu in the dealership finance and insurance office. Do not take California lightly.
Shanahan’s group wants a car buyer’s protection act. It would eliminate dealer reserve, step up protection against bait-and-switch or yo-yo transactions and add more dealership ID-theft measures.
How the proposal is massaged before it potentially goes on the ballot is to be determined. A real possibility is that it will be on the ballot in some form next November. It could become a standard in the other 49 states.
Based on observing trends, I’ve been on record for more than a decade that eventually dealer reserve compensation as we know it will cease.
It starts with credit union deals paying flat fees. It continues with manufacturer-incentive programs paying flats, then with many subprime deals paying either a flat or no reserve. Many deals are delivered with a flat fee structure instead of a yield-spread premium.
A shift to flat fees would not be market-driven. There are a couple of reasons for that.
First, lenders can’t get together and agree to a flat-fee system because that might be considered price fixing. Second, no lender is confident enough it could offer only flat-fee compensation to dealers, and still maintain or expand market share.
So, the change, if it is to happen, would be regulatory or statutory. And that’s peeking over the horizon.
Most forward-thinking dealers I know recognize this, and are shifting their F&I profit emphasis from reserve to product sales. Most of them set a goal of 80% F&I profit from product sales in the near future. They plan to continue to increase that percentage while increasing add-on sales per vehicle.
Gil Van Over is the president of gvo3 & Associates, a national compliance consulting firm that specializes in F&I, Sales, Safeguards and Red Flags compliance. Its website is at www.gvo3.com.