“My business people are going to leave overnight. They are not going to work for clerical wages,” Althoff said. “In my store today, I have 16 different sources of lending. Our business office people, F&I folks, will bring a customer in, look at the customer’s unique circumstances, and they will try to arrange the best possible loan for that customer…I would argue that we get paid less than the local realtor does for his services.”
If dealers lose flexibility, that will put pressure on finance departments to sell more ancillary products.
“The dealers are going to have to get their finance people trained into selling accessories, service contracts and prepaid maintenance. That is where the revenue is going to come from,” Kelly said.
Althoff said that might not be enough, especially at stores that are already selling ancillary products at a high rate. “Every customer should be offered every peace-of-mind product that is offered, and everyone who is well trained is doing that now,” he said. “But if I can save my customer [with same credit characteristics] $2,100 over the life of a loan why shouldn’t I make $350 to $400?”
Ritchie agreed: “It’s a profit center and it rightfully should be. You are going to the DMV for people. You are going to the bank for people. It’s not fleecing anybody,” he said.
Dealers will be hard-pressed to get the same contribution from finance departments if, or when, the trend spreads throughout the industry.
“Our job is essentially processing the application and selling ancillary products. If you can adjust to customers’ needs, there was some power in that…There is no longer any incentive for the financing itself,” Sandoval said. “We are hoping that on ancillary products they will offer a percentage over what you are financing. GE already does that. GE does a markup rate, but they allow you to sell back-end products at a certain percentage of whatever the price is.”
That, too, may be in jeopardy. Among the products showcased at the AFSA conference was a joint venture of Zurich Financial Services and Hudson Cook LLP. The system was designed to standardize an auto dealer’s desking process by offering recommendations on everything from quoting rates to menu usage.
“Right now, everyone is focusing on the CFPB’s concerns related to rate participation, but there are other issues out there, such as payment packing and potential discriminatory markups on ancillary F&I products,” said Glenn Roberts, Zurich’s national business development manager. “With the help of Hudson Cook, we’re giving them specific recommendations on what they can do.”
Consumer protection? If the entire lending industry moves to flat-fee, Althoff predicts that will lead to fewer options for borrowers and to more consumers getting financing from their own banks and credit unions before coming in to buy.
“It will force the customers to go to their own banks and credit unions. Banks will raise rates because the customers will have fewer resources.
It’s going to be a less competitive environment,” he said. “The real loser in all of this are the very people that the regulators purport to be protecting: consumers. My customers are better off because I am looking for the best loan for them.”
Even if dealers organize and pressure legislators to find a solution, it may be too late.
“It’s snowballed to a point now, I don’t think for the dealers to lobby for it would make a difference,” Ritchie said. “If the competition does the same thing, it becomes the industry standard. It’s adapt or die, and I think this is one of those cases. It’s no different than what the home industry went through.”
Kelly said the auto sector was the first domino in the flat-fee chain, but far from the last. “Auto is already feeling it because of auto rate competition. Before RVs, the motorcycles are going to be getting it. Bank of America tells me it’s going to be two years before the flat fee really sets in on the RV side,” she said. “I am a huge advocate for finance departments. I think the flat fee is just something we are not going to get away from. It’s coming on like a freight train.”