The Light at the End of the Tunnel

After spending a week in New Orleans for the American Financial Services Association (AFSA) conference and the National Automobile Dealers Association (NADA) convention, there is no doubt in my mind that the future is bright for the success of the F&I office. There was plenty of talk, recommendations and insight concerning the federal oversight looming over the finance reserve issue, and the buzz for inside the F&I office is and will continue to be technology. According to the “experts”, the industry saw changes in the market; some were good and some do raise concerns. Depending on your view of the impending changes in our industry, the light at the end of the tunnel may be one of two things – however there is a third.

If you have been in the automotive industry for any length of time, you know the one constant of our industry is change. Things change. The product, the customer, the dealerships, the owners, the laws, the credit, the finance companies - regardless of the changes, we adapt and overcome. We are now seeing the changes in real time. In the past the change would happen and it would filter down into the dealerships and then into the F&I office. Today we see it coming by reading it, hearing it and seeing on the news. Being able to see the changes in real time gives us the opportunity to make adjustments in our processes, so when we have no choice in the matter, we are already prepared.

If you have not started preparing for the loss of finance reserve as we have known it, the time is now. It is happening with some finance companies already, and soon all will be required to comply. This is not an option for the finance companies. I heard it directly from the Assistant Director of the CFPB: discretionary pricing at the dealership level should not be allowed. The good news is that dealerships will continue to be compensated fairly for the work and effort to secure a loan for the customer, as long as it is not based on a discretionary form.

There were several recommendations given to compensate the dealership:

• A flat fee – With factory-incentivized rates, many dealerships are accustomed to this already.
• A percentage of Line 5 (amount financed) – Many of our finance companies already offer this model.
• A hybrid – This was the new one. A mix between a basic flat, a percentage of line 5 and compensation based off of the term of the loan.

The last day of the NADA convention, there was a workshop that handed out a Fair Credit Compliance Policy & Program. It outlined the recommendations from NADA on how dealerships may want to handle finance reserve for the time being. This is a fantastic initiative encouraging a written process at the dealership level. This sends a message the federal agencies that we, as an industry, want to do what is right to discourage any type of discrimination.

In my opinion – and I hope I am wrong on this – the federal oversight hammer will come down, and the ability to negotiate the sell rate from the buy rate will no longer be an option. My advice: take the flat and focus on your product sales. I know this is not the most popular position, however, for the dealerships that focus on reserve the light at the end of the tunnel will be a train.

The Changing Face of F&I

Technology is a major focus by the factories on the sales floor; more and more factories are requiring the sales team to be equipped with a tablet to assist in the sale of the vehicle. We know many of our customers are becoming accustomed to technology in their everyday life as well, and the retail automobile industry is responding. When it comes to the F&I office, the move to more technology is not always embraced at the same level as the sales floor. Do not be afraid of the technology: it can help, and as time moves forward, it may make our lives, as F&I managers, a bit easier.

Many companies have introduced tablet-based F&I presentation tools and solutions, and these have come with mixed emotions, with good reason. One thing is clear though, the customers want to be involved, and tablet technology facilitates that involvement, but how involved is the business manager? This is where many F&I managers have a severe disconnect.

As a dealer, general manager, finance director or business manager, you may be looking at a tablet or digital piece for your F&I office and I encourage you to look; however, you need to find the right fit for situation. The wrong tablet or digital technology has proven to be as detrimental to the success of the F&I office as the right technology is helpful.

Many of the tablets are almost designed to be a digital F&I manager, reducing the amount of interaction between that person and the customer. This is the primary objection of many F&I managers. If you have an F&I office that is struggling, and the talent pool available in your dealership is shallow, this is a viable option. If you have good or even strong F&I manager, make sure you go with a tool that is more of an electronic menu. I saw a new one at NADA that will be released this month that is a great “split the difference” between something the customer can work with and something familiar enough to the F&I manager that they will be comfortable using it. Do you need a solution or a tool: there is a distinct difference between the two, and you need to find the one that will work best in your F&I office. The light at the end of this tunnel is the glow from a backlight.

The Stats Don’t Lie

There was a fair amount of statistics about the automotive industry from the finance side at NADA. Looking at the numbers, we have to be prepared for the direction the industry is moving: longer term loans, the popularity of leasing and the amount of disposable income are all factors that directly impact our industry and, more specifically, the F&I office.

All of the economic indicators show another strong year for 2014, with an increase of disposable income. What has helped this is less debt per household, less debt overall and more money, which allows for more cars sold and customers able to afford more F&I products.

A few interesting numbers: 84.8% is the finance and lease penetration on new vehicles, while that number is 54.6% on pre-owned. This shows that the finance companies have the money to lend and, more importantly, are willing to do so. This is being pushed by higher credit scores averaging 716 for new and 648 for pre-owned; the increase comes from less debt and more disposable income. This is a double bonus for our industry.

The average loan amount for 2012 was $26,685 with an average payment of $459, and an average term of 65 months. The interesting point here is that the average loan amount and payment stayed about the same for 2013 however the length of term increased, and now 72 months is normal for new car loans.

With longer-term loans more accessible, 19.3% of all new car loans exceeded 72 months last year. For the sales department, this increases the length of time to have a customer come back into the buying cycle, however for the F&I office this generates plenty of need for GAP and service contracts. From a statistical outlook, the light at the end of the tunnel is a bright and shiny opportunity for the F&I office.

2014 has all the indicators for a strong year in the automobile industry. The factories are producing fantastic products with the marketing behind them to drive customers into the dealerships. The credit scores are up, the finance companies have money to lend out and the customers have more disposable income. Drop in some technology, and the F&I office will have a strong – if not another record breaking–year.