Dealers consider a flat-fee future for F&I

Publish Date: 
Mar 17, 2014
By Holly J. Wagner

THE FIRST BANK to switch from variable rate vehicle financing to paying dealers flat fees for the loans they originate has some dealers alarmed at the implications.

“Our industry is threatened with extinction,” said Bob Althoff, dealer principal at Top 100 dealer A.D. Farrow Co. “The amount of money we make processing loans is a huge amount of our bottom line.”

FreedomRoad Financial, which had 346 dealer clients nationwide in 2012, according to a Federal Deposit Insurance Corp. (FDIC) review, switched to flat-fee financing March 10. The effect was immediate for some.

“A deal I just recently contracted on, if I had contracted it on Monday instead of the weekend, I would have lost money,” said Bruno Sandoval, finance director at Bert’s Mega Mall in Covina, Calif. “The profit margin – it was a very thin deal. The customer had decent credit but within the limits that FreedomRoad allowed us to mark up, waiting for two days, that would have been even thinner.” The difference, he said, could have been as much as 60 or 70 percent.

“It’s worth noting that historically over 60 percent of our business originated comes in without a dealer rate markup,” said Darin Campbell, president and CEO of FreedomRoad parent Evergreen Bank Group, of Chicago. “I would assume this percentage would be substantially lower in the auto industry as this is a major profit center at most automobile dealerships.”

FreedomRoad is the OEM-preferred finance company for Husqvarna, KTM, MV Agusta, Triumph and Ural.

No surprise. “We as dealers knew this was coming down the pipe two or three years ago. All you need is for one bank to get sued. One lawsuit that is successful and big enough, everybody will clam up or wait for their turn to go to court,” said Jeremy Ritchie, finance manager at World of Powersports in Decatur, Ill.

FreedomRoad made the change in response to an issue raised by the FDIC. FreedomRoad appears to be the first powersports lender to do so. Regulators are rattling their sabers over potential discriminatory lending and pressed a $98 million settlement from Ally Bank in December, although the bank disputed the allegations of discrimination. The Consumer Financial Protection Bureau (CFPB) issued a bulletin a year ago warning that it would be watching, and banks are starting to respond by eliminating the discretion in vehicle loans.

“I think it’s a trend and I think variable finance is on its way out – due to the consumer protection agency, something we all love to hate,” said F&I consultant Jan Kelly. “It’s because the dealers and lenders cannot be accused of discrimination on lending rates. Canada has been on this for a long time. There is no negotiation of tiers, you get one rate and that’s it.”

CFPB compliance was a hot topic at the American Financial Services Association (AFSA)’s 2014 Vehicle Finance Conference, held In conjunction with NADA’s annual convention in New Orleans earlier this year.

CFPB’s liaison to the auto finance industry, Patricia Ficklin, said banks are the ones choosing to respond to regulation with flat fees to dealers. “The bulletin does not require a flat dollar amount as compensation,” she said, adding that the bureau will study all forms of compensation.

“To be clear, we are not challenging the industry’s use of appropriate underwriting practices,” said Ficklin, who’s also assistant director for the CFPB’s Office of Fair Lending and Equal Opportunity. “It’s the discretion of the dealer after the lender underwrites the loan.”

The future of finance departments The implications for finance departments are many. Kelly and finance managers say the departments are going to have to look in other places for their contributions to the bottom line. And Althoff is worried about an F&I brain drain as powersports dealership personnel migrate to auto dealers or other fields altogether.