David Ruggles, first published in Auto Finance News
Auto industry finance experts
agree that the Consumer Financial Protection Bureau will eventually turn
its focus to rate markup on dealer arranged finance contracts.
Consumer advocates bring up anecdotes of what they refer to as “rate
gouging” as proof regulation is needed. David Robertson, President of
the Association of Finance and Insurance Professionals, points out,
“There is no empirical evidence that consumers who use auto dealer
arranged financing pay higher interest rates than other auto loan
borrowers.” But Dodd Frank has already imposed similar legislation on
the mortgage business capping rate markup and broker compensation.
The threat that the CFPB may take away the opportunity for dealers to
make “rate spread” is an emotional issue, if only for the sake of
principle. According to Terry O’Loughlin, director of compliance for
Reynolds and Reynolds Co. (www.reyrey.com), “The CFPB would more
effectively advance consumer interests if it identified serious problems
to police. It is attempting to provide a solution to a problem which
doesn’t exist. There is nothing preventing consumers from shopping
rate. In fact, it has never been easier for them. Often, dealers are
able to gain financing for consumers they couldn’t arrange for on their
own.”
Despite the fact that auto industry is dug in against regulation of rate
markup, there is another way of looking at the issue. Highly respected
Finance and Insurance trainer, George Angus, training director for Team
One Research and Training, provides perspective. According to George,
and others who agree with him, myself included, making excessive rate
mark-up is counterproductive, perhaps even “stupid.” In fact, George
used that exact word to describe the consequences of excessive rate
markup to an enthralled group at last summer’s F&I conference held
in Las Vegas. It is dealer compensation plans for their F&I
producers that are the problem.
Why is excessive rate markup “stupid?” Increasingly there are companies
like Rate Genius, who contact borrowers with an offer to pay off their
“unnecessarily high interest rate” auto loan and replace it with a more
“market rate” contract, thereby reducing the consumer’s monthly
payment. They represent the market at work. Rate Genius, and the
others, have every right to do what they do. Depending on how long
after the original bank contract has been signed by the consumer at the
dealership, and the dealership’s underlying agreement with their lender,
the dealership may or may not receive a charge back to their interest
reserve. The lender certainly takes a hit. It is quite likely that the
dealership experiences a chargeback on other products sold and added on
to the contract being paid off by Rate Genius and the others, and
replaced with their own products.
The real damage is done to the relationship between the consumer and the
dealership. What are the chances the consumer will return to the
dealer for another vehicle? What are the chances the consumer will
speak well of the dealer who charged them the “excessive rate” to their
friends and associates?
Paying the F&I department based on income PVR (Per Vehicle Retailed)
encourages charging higher than market rates that can end up in
premature borrow payoffs, chargebacks, and hard feelings on the part of
the dealer’s customers. Angus suggests paying F&I producers based
on finance penetration and a formula based on the number of products
sold per deal.
Our industry needs to tend to this issue for reasons of common sense, before the CFPB gets involved.
A new learning experience for me. This is the first time saw this article and this is something that my auto title company should be familiar of. Thanks for sharing!
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