Tag Archive | "Administrators"

Trading Rate for Product (and Why It’s a Very Bad Idea)


Your company may design excellent and appealing coverages, properly price and reserve, and perform exquisite claim administration. But at the end of the day, none of that matters if the F&I manager facing the customer can’t make the sale. Frustrating, huh?

To help F&I managers get over the hump and make the sale, providers and administrators offer onsite or home office training, technology tools such as menus and desking software, and advice. It is everyone’s interest that any advice given is actually legal. Sometimes that’s tricky.

The Nuisance Is in the Nuances

The reason lawyers can cost so much is their training and experience with “Depends.” No, I don’t mean the adult diaper (though there may be some overlap). Rather, whether something is legal or not depends on many different variables, not all of which are obvious. So even if an F&I manager knows a basic legal principle, the nuances can get him in trouble.

Case in point: I was recently asked by a TPA employee (responsible for keeping their representatives in the field out of trouble) if it was OK for a dealer to “trade rate for product.” Trading rate for product means offering a customer a lower interest rate if the customer will agree to purchase an F&I product, such as a vehicle service contract. The general legal principle is freedom of contract, right? Except in certain states (I’m looking at you, Florida), the retail cost of F&I products is not regulated, so dealerships may negotiate their price. APR is negotiable, too. So trading rate for product should be perfectly fine.

And it is … except when it’s not.

Here’s one variable to consider: does the product price become a finance charge? This is a very, very big issue, and the leading reason I don’t recommend dealers trade rate for product. The Truth in Lending Act (TILA) defines “finance charge” as “the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit. The finance charge does not include charges of a type payable in a comparable cash transaction.”

So let’s say a customer has been offered an APR of 4.5% on his financing and the dealer offers to drop the APR to 4.0% if the customer buys a $2,000 service contract. This could be a method of “hiding” rate within the cost of the VSC. In Florida, where there is a presumption every customer pays the same amount for the same VSC, this might not be a problem. Everywhere else, it might be. Say the finance customer pays $2,000 for the VSC that drops his APR, but a cash customer paid $1,500. A court could easily find that the $500 difference was, in fact, a finance charge.

“So what?” you ask. Here’s what: All finance charges must be accurately and conspicuously disclosed in the “TILA box” on the Retail Installment Sale Contract. If part of the finance charge is buried in the cost of the VSC, the disclosures in the TILA box will be inaccurate and misleading.

“So what?” you ask again. Here’s what, again: If the violation was (1) intentional, (2) grossly negligent or (3) part of a clear pattern, all affected customers are entitled to restitution. In most dealerships that trade rate for product on a daily basis, both factors (1) and (3) will be present. That is not good for the dealership. And it only goes downhill from there.

Regulatory fines are the least of the dealership’s worries. Because trading rate for product is often a standard sales tactic at the dealerships who indulge the practice, it now sets up a class action. And since it is a violation of federal law to understate APR or finance charge, punitive damages enter the picture.

The CFPB’s Mandate

But wait, there’s more. Remember the Consumer Financial Protection Bureau? When a dealership reduces the rate for customers that buy a product, it triggers a deviation from its standard dealer participation rate. The CFPB recognizes seven legitimate nondiscriminatory reasons for deviating from the standard rate. Purchasing an F&I product is not one of them. (If the dealership does not have a fair credit policy and program such as NADA offers, it has a whole other set of problems that we’ll address in a future article.)

And we’re not done yet — not by a long shot. If a dealership routinely trades rate for product, can it prove the initial APR was not artificially inflated to make room for the “discount”? This requires an analysis of the desking process and timing of when a credit report is pulled. In short, any dealership trading rate for product had better have a bulletproof and consistent desking process that can demonstrate the APR is appropriate for the customer’s credit risk, and has a consistent mark-up, like the standard dealer participation rate discussed above.

On top of that, to protect the process of trading rate for product, there should be a standard markup on products as well. If the profit margins on products are all over the board from deal to deal, proving a legally compliant deal is difficult at best.

And another thing: When a deal jacket is audited, one of the things auditors look for is variation in APR and amount financed from the first pencil to the menu to the buyer’s order and RISC. Any variation requires an explanation. Is there a process in place to memorialize the negotiations and create a clear paper trail?

Think this is confusing? Imagine how confusing it could be for the customer. And in the eyes of the FTC, if it’s confusing, it’s deceptive. Another potential whammy.

Does the dealer trade rate for product more often with women and minorities than white dorks in bow ties? Add potential discrimination to your list of worries.

Going back to the original question, is it OK to trade rate for product? Of course it is — as long as you dodge all of the landmines that come with the practice. Do you trust your client dealerships’ personnel to consistently do so? Neither do I. And that’s why I never recommend it.

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Industry Trends for 2016


With record vehicle sales in 2015 and gas prices and unemployment on the decline, the automotive retail and finance industry is poised for another big year in 2016. To better understand all the factors at play and how they will affect the sale and administration of F&I products, P&A asked leading executives and experts to answer a series of questions relating to the U.S. economy, the auto industry and new trends to look for.

The Economy

All indications point to a continued recovery from the Great Recession, which created unprecedented pent-up demand among consumers who have kept their old cars on the road far longer than anyone expected. As of press time, the seasonally adjusted annual rate (SAAR) for new-vehicle sales had reached the 17.2 million-unit mark and showed no signs of slowing.

“Let’s all take a deep breath and enjoy the good times that our industry is in right now!” said Jim Maxim Jr., president of MaximTrak Technologies. “With SAAR projected to approach 18 million units, more impressive vehicles to sell across all franchises and lenders getting more aggressive to take share, the automotive industry is poised for impressive and sustained growth over the next few years.”

All our experts agreed, with most noting that leading economic indicators such as interest rates, the price of oil and unemployment figures are all pointing in the right direction.

  • Interest Rates

Conventional wisdom dictates that lower interest rates mean more sales, more financing and more F&I products. So in December, when Janet Yellen, chairwoman of the Federal Reserve Bank, announced the first increase in short-term interest rates since 2006, one might expect some level of anxiety to creep into any discussion of the nation’s economic health.

Not so, said our experts, many of whom agreed with Yellen’s contention that the interest-rate hike was in fact a vote of confidence in the recovery.

“The increase is being justified as proof of an ever-strengthening economy,” said Mark Thorpe, president of The Impact Group Inc. “That, combined with low energy costs and low inflation, bodes very well for 2016.”

“The recent lift of the federal funds rate may cause slight headwinds, but that shouldn’t be a strong deterrent for motor vehicle sales and financing,” said attorney Aaron Lunt, who serves as assistant general counsel and head of regulatory affairs for The Warranty Group Inc./Virginia Surety Company Inc. Lunt added that, regardless of the economic climate, the ability to secure their vehicle purchase with protection products remains a “critical option” for car buyers.

Michael Tuno, president of World Class Dealer Services Inc., predicted that the modest increase in short-term interest rates will be offset by falling gas prices. “I see the economy at large remaining strong, especially the auto sector,” he said. “Interest rates will inch up and the price of fuel will remain low.”

“Most current indications suggest a strong 2016 for car sales,” said David Trinder, CEO of F&I Administration Solutions LLC. “However, it goes without saying that this is an incredibly competitive industry, and an administrator’s growth is just as dependent on their ability to meet dealer and customer demands as on the market itself. I believe that supporting all dealer compliance initiatives as well as having the right technology and product will be the main focus of administrators in the coming year.”

  • Oil Prices

Indeed, the cost of oil continued to freefall in the second half of 2015, plummeting to $38/barrel in December. The principal cause is an abundance of supply.

“OPEC is not cutting production in their effort to drive tar-sand extraction out of business,” Thorpe said, predicting that we won’t see per-barrel prices approach $50 again in the foreseeable future.

Thomas Elliott, executive vice president of StoneEagle, said he expects oil and gas prices to remain stable throughout the year. Brent Griggs, president and CEO of Portfolio, said gas prices — along with interest rates and inflation — could be “a bit higher” in 2016, but still low by historical standards.

“I expect the U.S. economy to perform quite well in 2016,” Griggs said.

  • Unemployment

Griggs’ prediction is further bolstered by a steadily improving job market. The U.S. economy added 292,000 jobs in December, capping a year that saw unemployment fall to 5% nationwide — a nine-year low, as Griggs pointed out.

“The healthy job growth at the end of 2015 reflected strength across many sectors of the economy, and we expect unemployment to drop from its current 5% to around 4.6% by the end of 2016,” Elliott added.

Thorpe noted that the job gains are reflected in the auto industry’s workforce, which employs 937,000 Americans in vehicle and parts manufacturing alone. “Every domestic auto manufacturer is adding to their workforce,” he said. “Auto sector ‘hours worked’ is much greater than any other manufacturing sector.”

  • New-Vehicle Sales

All the factors listed above should continue to spur new-vehicle sales, which reached a 15-year high in 2015. Americans spent about $570 billion on their 17.5 million new cars and light trucks, which is a 5.7% increase over the prior year.

“I see another strong year for new-vehicle sales,” said John Braganini, president of Great Lakes Companies. “Low oil prices will buoy consumer spending, and much of that will find its way into the retail auto channel. The stock market will adjust to the planned changes to monetary policy, the election will usher in new leadership and the economy will forge ahead.”

2015 was a big year for mergers and acquisitions in the dealer space. Berkshire Hathaway set the high-water mark when the investment group’s directors finalized its purchase of the former Van Tuyl Group in February, reportedly for somewhere around $4 billion.

“Already profitable dealers will continue to benefit from the strength of the auto market, and dealership acquisition by public and private auto groups will continue at a steady pace,” Griggs predicted.

Braganini agreed, adding that dealers should take a note from other industries, such as furniture stores, grocery stores and restaurants, that have seen an uptick in consolidation. “Dealers with disciplined processes and accountable business models will absorb those that choose to stand still,” he said. “2016 will usher in the business conditions that will drive that trend.”

The Industry

There was a time when a healthy economy and correspondingly strong sales would be all a dealer (or product provider) needed to feel secure about the future of their business. But the automotive industry is changing around them, and the driving forces behind those changes can be distilled into two categories: compliance and technology.

  • Compliance

The main regulator on our experts’ minds is the Consumer Financial Protection Bureau. The CFPB failed in its bid to exert direct regulatory control over dealers, but its directors have gone after the banks and finance companies those dealers rely on to keep the metal moving over the curb. Many of our experts expressed concern that the agency could target F&I products next.

“The pressure on lenders from the CFPB will result in more stringent guidelines on what products are sold for, how they are sold and their respective profit margins,” said Brian Reed, president and CEO of F&I Express, who singled out credit-related products such as GAP and credit life and disability as potential targets. Reed also predicted that more dealers will begin “self-policing” markups on all products to establish some sort of consistency, a move many of our experts would applaud.

“We encourage our dealers to be transparent and fair with consumers to avoid giving the CFPB any reason to be concerned about the F&I sales process,” Griggs said, adding that “unacceptable pressure” from manufacturers pushing dealers to sell OEM products also demands scrutiny.

Mike Burgiss, vice president and general manager of MakeMyDeal, a Cox Automotive company, believes prices should be consistent and easy to find. “As an industry, when we embrace the idea that we must price the product, not the customer, we stand to not only stay ahead of the trend toward more transparent pricing rules, but the research shows we can grow sales and profits as well,” he said.

Maxim reported that he has seen a push for “product margin controls and standardization” from multiple fronts, including dealer groups and product providers. “We have seen major groups standardize product markups and develop processes and business rules to systematically prevent products from being sold that exceed those standards,” he said. “We have also seen independent product providers implement suggested retail pricing rules that recommend retail rates to dealers.”

Joel Kansanback, president of Automotive Development Group (ADG), doesn’t expect any new regulations to materialize in 2016, but that shouldn’t stop the industry from being proactive to head them off.

“If a product costs $250 and is sold by a rogue dealer for $4,000, then we should all be making an effort to stop that behavior,” Kansanback said. “It is indefensible and, unfortunately, would probably happen to a consumer who is part of a protected class.” He added that he would encourage agents to work with dealers to establish a minimum and maximum markup and help them monitor it. “Our protection products do a lot of great things for a lot of consumers and, as a byproduct, there are a lot of people making a handsome living selling them. I would hate to see a few bad apples ruin it for everyone. We can either regulate ourselves or get regulated by a government agency.”

Tuno said he felt encouraged by recent scrutiny of disparate impact, the much-maligned theory the CFPB has relied on to prove lenders have engaged in discriminatory behavior, intentionally or otherwise. But he agreed that self-regulation on the part of dealers, agents and providers could be beneficial for several reasons.

“Having a workforce that’s more in tune with compliance makes for a better overall customer experience by building trust with the customer and promoting transparency in the process,” Tuno said, adding that guaranteeing the security of each customer’s personally identifiable information also should be a priority for dealers. “Consumers will want all their privacy protected at all levels of the dealership experience,” he warned.

Finally, Lunt noted that ancillary products and services are regulated by the states, so there will always be changes afoot. “I don’t foresee anything monumental at the state level, however, although 2016 will be a more active legislative season as more state legislatures are scheduled to convene,” he said, “the most significant influence will result from changed practices stemming from CFPB enforcement actions.”

  • Technology

The consensus among our experts is that the increased digitization of marketing, sales and F&I processes is being driven by consumer demand. The Millennial generation continues to gain power and influence as its members come of age and enter the new-vehicle marketplace in force. Maxim used the word “techspectations” to describe the shift.

“In 2016, drivers want to communicate fluidly and stay socially connected,” he said. “That tech-driven lifestyle will need to be effortlessly integrated into their vehicle functionality.”

“It is quite clear that the Millennial generation arrives armed with a breadth and depth of information that is unparalleled,” said Elliott. “They expect the dealership representatives to add to this knowledge by serving as an expert prepared to provide additional information.”

If they’re successful, he added, they will leave Millennial car buyers with the feeling that an “informed decision” has been made. Maxim backed Elliott’s contention, noting that people tend to remember more about how they felt about an experience than what was said during it.

“Intelligent processes that identify consumer needs based on crucial deal variables and their ownership profile will change the way we sell and interact with customers,” Maxim said.

“The Internet will continue to extract new efficiencies from the retail channel, and I expect to see continued pressure on both new- and used-vehicle gross margins,” Braganini said, adding that the “ongoing deterioration” of profit margins will force dealers to find revenue elsewhere. “Dealers will be going to F&I and service to remain relevant.”

Reed believes a “new age” for F&I is on the horizon and the days of the 10-foot by 10-foot office may be numbered. “More dealers will shift to a salesperson owning the customer through the sales process, including F&I, even though the total number of dealers who change to this new process will still be rather small,” he said.

“We can no longer operate in fear of changing our sales and F&I processes. In 2016, early adapters will begin to win by having better more transparent Web strategies,” Kansanback noted. He believes consumers’ need for speed throughout the car-buying process will force everyone from manufacturers and dealers to agents and product providers to find new ways to share transaction information — minus a stubborn few. “Another set of dealers and their partners will cling to the way they have always done business and hope that change really isn’t happening.”

Thorpe sees no reason to fight it. “I’m expecting to see continued rapid innovation supporting a more efficient and effective sales process. Providers are finally catching on to the fact that the average customer doesn’t like the approach they’ve been subjected to for so long,” he said, adding that F&I managers must be willing to facilitate, rather than control, the transaction. “Speedy, direct, easy-to-understand, customer-centric capabilities will guide and inform the process and be the great equalizers for our F&I users.”

Trinder agreed but stressed that administrators must have the ability to support the way dealers want to show their products on their websites or in the F&I office. While a few dealers will embrace these new trends, he added, many are not taking them seriously.

“Administrators and their agents — this year more than any other — need to help dealers see the need to adapt to the new demands from buyers and the expectation they have from technology,” Trinder said. “Those who are at the front end of this move will not only solidify their relationships with their dealers but will undoubtedly see the positive effect on the bottom line.”

Putting customers in control will allow them to move further down the sales channel on their own, Tuno added, arming themselves with information that was, in the past, only available from sales and F&I professionals. He also identified the “antiquated” dealer management system (DMS) as a “barrier” to the success of this shift.

“Technology that can optimize data will make the entire retail experience faster, better and cheaper for the dealer and the customer,” Tuno said.

Burgiss believes 2016 will prove to be a watershed year in this regard. He predicted that pricing and monthly payment amounts for F&I products will begin to appear on many more dealer websites. All the better, he said, to satisfy the 83% of car buyers who, in response to a MakeMyDeal survey, said they would prefer to learn about F&I products on their own time. The same research showed that the same respondents would be more likely to buy F&I products if that were the case.

“The growth of digital retailing will continue to accelerate,” Burgiss stressed. “Throughout 2015, we saw a shift in dealers’ view of digital retailing from ‘That’s where the market is going someday’ to ‘I’m ready to start selling cars online. I just need to know the right way to get started.’”

Trends to Look for

If you think that’s all we have to look forward to in 2016, think again. Our experts identified a number of additional trends they believe providers and administrators should keep an eye on in the year ahead, including which F&I products will perform best and sweeping changes coming to the F&I process.

  • F&I Products

Most of our experts agreed that VSCs will remain at the top of dealers’ menus in 2016.

“Vehicle service contracts will continue to grow and consumers will see increasing value in purchasing coverage,” Maxim said. The value should become increasingly evident, he added, as in-vehicle technology continues to advance and retail labor rates continue to rise. “Frankly, you can’t go to any major retailer without being asked to buy the ‘extended protection,’” he added. “And with vehicles, everyone knows the costs are real.”

Griggs agreed, noting that VSCs are “understood and accepted” by consumers and generate “substantial profits” for dealers. “I expect extended service contracts to continue to be the strongest selling product in the F&I suite, followed by GAP and prepaid maintenance,” he said, adding that the recent surge in products designed to meet the needs of lease customers could soon begin to level off. “As interest rates begin to rise and leases become more costly, I expect the leasing trend to reverse again.”

Tuno, however, believes lease products will remain a “growth segment” for as long as the cost of repairing vehicles continues to grow, but said service contracts will remain the top seller, noting that their utility increases as the average loan term continues to stretch.

“VSCs hold the most profit for dealers and bring the most value for the consumer who has a longer and longer finance term,” he noted.

Thorpe also holds out hope for lease products and said the interest-rate hike could spur higher penetration rates on an F&I product that came under fire in some states in 2015.

“I actually believe biweekly payment services are going to rebound in a big way,” Thorpe said. “A couple of the providers who recently got themselves in trouble look to have resolved their issues. The others have taken the experience as a teachable moment and have made changes in a number of ways to strengthen their offerings. With interest rates gradually rising, I think we’ll see these services return to a higher level of awareness and acceptability for dealers.”

“VSCs and GAP will remain the primary products, but we have seen significant growth in prepaid maintenance and appearance protection products, and there is no reason why this should not continue,” added Trinder. “We also expect to see a continued focus on packaged products as administrators work to reduce the number of products being displayed on menus.”

Kansanback predicted that dealers who currently offer six or seven products on their menus will have more success if they pare their offerings down to four. Burgiss added that the performance of individual products will depend more upon their appeal to customers, which he believes could be augmented by moving the initial selection process to the Web.

“With an online self-discovery process, consumers can explore and self-select those products that resonate most to their individual needs; for example, tire and wheel, key replacement or prepaid maintenance,” Burgiss said. “I expect we could see some modest shifts in sales volumes across the range of products. More importantly, the opportunity for greater consumer education of product benefits leads to overall higher sales.”

  • The F&I Process

Kansanback pulled no punches when describing his vision of the F&I office of the future.

“If you want to continue to say F&I can’t be done successfully without a traditional F&I manager, then you are like the traditional cab driver who believes Uber is a fad,” Kansanback said. Like Burgiss, he predicted the selection process will soon move online. “We are going to see more F&I processes and technologies built around getting customers more information sooner.”

Griggs sees the changing F&I process as proof that dealers have begun to recognize the need to allow car buyers to steer the transaction.

“This trend will only continue,” he said. “F&I providers have to be prepared to be a part of these technological changes to ensure that consumers continue to have the opportunity to purchase their valuable products and services.”

As a former F&I manager and director, Thorpe worries that digitizing the selection process could create more objections and barriers than it knocks down.

“As I’ve said repeatedly, our first principle should always be to ‘do no harm’ to our F&I managers or users,” Thorpe said. “I haven’t seen any hard data yet that indicates F&I product production increases by exposing the customers to an online digital product presentation before they’ve even bought the car.”

“I am very supportive of any intelligent and productive way to share more information about F&I products,” Trinder said. “So much has been made of the Millennial generation and their perceived lack of interest in the current processes. If administrators are confident in the value of their products, they need not fear a tech-savvy, well-researched car buyer. They could prove to be their very best customers.”

Reed has been a vocal advocate of erating and econtracting. “The industry will continue its march away from the five-ply and progress ahead to an electronic process,” he said, predicting that the adoption rate of electronic signatures will increase from 5% to 25% by year’s end.

Tuno joined Reed’s side, describing the technology as “faster, better and cheaper.”

“That means that the dealer will continue to embrace erating and econtracting in an effort to speed the transaction along,” Tuno said, “and customers will continue to embrace the whole spectrum of technology throughout the buying and servicing process.”

Maxim noted that the drive to add more technology to the F&I process extends beyond that department as well. “What started as an iPad movement in sales has morphed into dealers redesigning showrooms and processes to leverage touchscreens and interactive technologies,” he said. “Dealers are paying attention to their retail sales environment and many are ditching the old school set-ups of the tradition negotiating desks —me on one side vs. you on the other — in favor of creating collaborative delivery centers. We are starting to see more one-price and one-person sales models today than we have ever seen before.”

Burgiss said that, among the dealers with whom he works, the sweeping changes described above have already begun to pay off.

“Dealers who have begun the journey to a digitally enabled sales process have already started to see more satisfied customers, a more efficient sales process and higher profits,” Burgiss said, noting that those dealers see technology not as a way to replace personnel — or the dealership itself — but an opportunity to improve the things they already do well. “Embracing change is never easy, but the sooner we get going, the more competitive we will be in 2016 and beyond.”

It is worth noting that, despite doubts surrounding the global economy, terrorist threats and the upcoming presidential election, none of our experts found any reason to believe the automotive industry — and the F&I segment in particular — would not remain strong for at least the next several years. Interest rates and gas prices may one day rise to uncomfortable levels and new technology could prove to be disruptive. But Americans need F&I products just as surely as they need cars, and sales of both should remain strong for the foreseeable future.

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