It's been almost a year and a half since the Consumer Financial Protection Bureau (CFPB) released its bulletin explaining how certain lenders offering indirect auto loans through dealers would be held responsible for unlawful, discriminatory pricing practices. The National Auto Dealers Association (NADA) also published guidance on how dealerships may become compliant with the CFPB's new restrictions, with advice on utilization rate guidelines. Recently, BMO Harris Bank switched to a flat fee structure and Ally Financial was ordered to pay $80 million in damages to consumers, whom the CFPB stated were harmed by the bank's discriminatory markup policy.
With these new compliance guidelines, many think it's now a matter of when lenders will go to flat rates on their loans, not if. With a lending institution of BMO Harris' size making the change, it may be only a matter of time before other lenders follow suit, especially if the BMO Harris model proves to be successful. The interesting impact of this regulation is that credit unions may now have a significant advantage on the indirect loan battlefield.
As banks and other indirect lenders struggle to make decisions on implementing a flat fee system that is competitive and beneficial to both them and their dealer partners, many credit unions have already achieved success with a flat rate structure, albeit at very thin margins. Flat fees require an entire paradigm shift for lenders; from pay plans and cost center adjustments, to resource training and revenue re-forecasts. And, all of that takes time.
Indirect lenders considering a flat rate structure fundamentally level the playing field for credit unions in the indirect space, in a manner that may be unprecedented. For example, F&I managers will now be motivated by the overall deal terms rather than the cheapest buy rate.
As the ground war on loan funding capacity and service ramps up, credit unions with an indirect market strategy need to re-evaluate how much money they have to lend, and how to get this message directly to finance managers and the dealer. Dealers will place more and more emphasis on consumer protection products and less on shrinking finance reserve margins. Loan advances on "soft adds" will become increasingly important.
It varies by market, however credit unions have traditionally advanced more for "soft adds" than captives or banks, perhaps because they know first hand how the protection products have positively benefited their members. And, in my experience, from the dealership point of view, credit unions are more strategic in reviewing several aspects of the loan structure versus just looking at credit score or algorithm.
Bottom line, many credit unions work with local dealers in their market. For this reason, they already have a better understanding of their local dealers' and members' needs.
This is an important time to get ahead of the curve, and for credit unions to re-evaluate customer/dealer service and decide how to consistently provide dealers an indirect model that meets their demands:
- Are my lending representatives accessible during dealership hours, not just credit union hours?
- How quick is my turnaround on loan decision-making, and how can I speed it up?
- Do I provide understandable guidelines on the types of members who are eligible for my loans, and more importantly, do F&I managers understand?
- Have I implemented a quick and efficient funding process?
- Is my institution making the F&I manager's job easier?
- Am I helping my dealers deliver more cars?
Seems pretty straightforward, right? You'd be surprised at how many lenders struggle with consistency in these areas. Your availability and active engagement with the dealer is critical. Ensuring that you can advance the amount needed for the sale of F&I products and that your field reps are adding value to the dealer's operation at every point of contact will keep your organization in a market position where dealers want to conduct business with you.
Steve Klees is Senior Vice President, Specialty Channels at EFG Companies.
