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Dealer Reserve: Making Cents of the Controversy

July 2004, F&I and Showroom - Feature

by Joan Shim - Also by this author

Unless you've been hiding under a rock the past few months, you've probably seen at least one news story in the press trumpeting abuses in the dealership finance office. Countless newspapers have published the token exposé on dealer-arranged financing, quoting car buyers who thought they were getting a competitive loan interest rate only to later discover that they were victims of gouging.

The negative publicity has had significant ramifications. Captive finance companies and banks have continued to set caps on markups in response to lawsuits and public scrutiny. Consumer groups and attorneys general are pushing for legislation that would shrink and regulate so-called dealer kickbacks. Plaintiffs' attorneys that have targeted auto finance companies for alleged abuses are now suing megadealers (who also happen to have deep pockets). And many of them seek class-action certification.

F&I managers and dealer advocates are outraged, arguing that these critics are blowing the problem out of proportion. "Of course, in every industry, you're going to find people who are abusing the system," says Ron Martin, trainer and president of The Vision of F&I. "But it certainly isn't as widespread a problem as some would like you to think. For some time now, lenders have placed limits on rate spreads. Market conditions have also required dealers to keep rates low."

Nevertheless, what does all this hoopla mean for dealerships? When the smoke clears from the barrage of assaults on dealer reserve, in what shape will you find your finance office? Weaning your store off reserve income today will help your business to thrive, regardless of what the rules of F&I are when the dust settles.

Rate Faces Multiple Pressures

Finance managers are baffled by the overreaching measures to regulate reserve profit. "If profit disclosure is going to be the standard, then it should be that way for all products in all industries," says Michael Krail, F&I manager at Land Rover Princeton in Princeton, N.J.

"While we're at it, why don’t we require that every sales transaction for every item sold in the United States come with a full disclosure? When I buy a pack of gum, a newspaper, furniture, toys, games, food or anything else, I deserve a disclosure," says Krail. "It gets to the point of ridiculousness. The disclosure requirement needs to apply to all or none."

But legislation in certain states is in fact singling out the auto industry to require profit disclosure to customers. In California, the so-called car buyer's bill of rights, which requires that charges are consistent and fully disclosed, passed in the Assembly and moved to the Senate for a vote. Related measures have been pushed in New York, Illinois and Tennessee but haven't made as much headway.

Whether the laws will be passed remains to be seen. Meanwhile, dealers face tightening restraints on reserve from auto lenders. Lawsuits alleging unfair and discriminatory financing prompted many major manufacturers' finance arms to cap the markups they allow dealers. Nissan Motor Acceptance Corp. became the first captive finance company to settle a class-action suit last year. The company -- without admitting guilt -- established a 3 percent cap on markups. Ford Motor Credit Co. put a 3 percent limit in place a few years ago.

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