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Perfect Storm

December 2017, F&I and Showroom - Feature

by Tariq Kamal - Also by this author

On Sept. 13 at the Gaylord Texan Resort & Convention Center in Grapevine, Texas, near Dallas, dealers, F&I professionals, agents, product providers and other attendees of Industry Summit 2017 gathered for “From the Boardroom.”

The 50-minute panel discussion has become an annual highlight for those seeking an inside look at the current state and future prospects of automotive finance. For the moderator, Gregory Arroyo, it’s an opportunity to look beyond the headlines with some of the experts and thought leaders that will help shape the market in the year ahead.

“My approach has always been to bring up some of the headlines from the year and pose them to our panel,” said Arroyo, who serves as F&I and Showroom’s editorial director. “And this year, we have a very diverse panel.”

The group included Jerry Biller, president of EcoProProducts, Bob Lettis, vice president of strategic alliances and business development for 700Credit, John Luckett, The Warranty Group’s senior vice president of sales and marketing, Matt Orlando, director of customer solutions for RouteOne, and John Palmer, president and CEO of ProMax Unlimited and ProCredit Express.

In the News
Arroyo started the discussion in high gear, rattling off a list of recent developments that included softening demand for new cars, a “rollercoaster ride” in the used-car space, General Motors’ new disclosure requirement for non-OEM products and parts, and ongoing advances in digital retailing, among other topics.

Finally, in the midst of a devastating Atlantic hurricane season, Arroyo raised the issue of Hurricane Harvey, which struck the Gulf Coast in late August and is fated to go down as the costliest natural disaster in U.S. history.

The Warranty Group’s John Luckett said Hurricane Harvey, which is expected to go down as the costliest natural disaster in U.S. history, is going to have a multimillion-dollar impact for most all providers of guaranteed asset protection.
The Warranty Group’s John Luckett said Hurricane Harvey, which is expected to go down as the costliest natural disaster in U.S. history, is going to have a multimillion-dollar impact for most all providers of guaranteed asset protection.

“When we’ve experienced storms in the past, we’ve seen an impact where sales lagged and then there was an upboost when consumers started getting their insurance checks and getting back into the market,” Luckett said. “So I think third-quarter results will be difficult for us, but once we get into the fourth quarter, I think we’ll start seeing an uptick.”

Some dealers in Houston and other affected areas were able to move their inventories out ahead of the storm and reopen soon after it passed, Luckett added. Others were still underwater and could be shuttered for months.

Palmer said the special finance segment could take the hardest hit, noting that the market has already been subject to a “tightening” in the difference between transaction prices and book values. “We all know that the spread amounts to quite a bit of your profit potential in subprime. … I think it’s going to be even tougher to buy used vehicles at good prices, and the book values are going to continue to adjust in the opposite direction.”

Arroyo noted that Dealertrack reported an 80% decrease in activity on its credit application network in Harvey-affected areas in the days following the hurricane’s landfall. He asked Orlando whether RouteOne saw similar declines on its network.

“We did see a small blip in volume during the hurricane timeframe, but we saw volumes get back up to record levels by the Labor Day weekend,” Orlando said, noting that his company offered dealers in affected areas access to digital sales tools they could operate remotely and sent representatives into the field to help implement them.

Looking back at the 49% spike in sales that followed Hurricane Sandy in 2012, Arroyo reminded the audience that, at that time, used-car inventories were still recovering from lost new-vehicle sales during the Great Recession. Could the anticipated influx of 4 million off-lease units — which experts have warned will oversaturate the market — actually “save” used-car values?

“The folks who were affected will have an option. … There are some great values on used vehicles out there that they didn’t have before, with Sandy,” Luckett said. “I think the used-car market will be fine.”

Noting the rising frequency and severity of GAP claims, Arroyo asked Luckett how providers would be affected by the thousands of total losses caused by the hurricane.

“We have seen an uptick in GAP frequency. Severity has been an issue. ... But I don’t see GAP spiraling out of control,” Luckett said. “With Harvey, it’s not the hurricane damage but the flood damage that causes the claims. There is going to be a multimillion-dollar impact for most all providers that are out there.”

Looking beyond hurricane season, Luckett said the amount of negative equity carried on the loan and sometimes baffling costs for replacement parts could prove to be more significant factors in the long-term health of the product.

“The badge on the front grille of a Toyota Corolla is $965 to replace. The LED lights on that same car are $1,300 apiece. If they set off the airbags in a frontal collision, you’re going to have over $10,000 in airbag repairs. … We’re seeing a rise in the total cost of claims because of the cost to repair the technology.”

Rainy Days for Subprime
Hurricane Harvey struck at a time when finance sources are tightening credit underwriting standards for automotive, Arroyo said, noting that Experian reported the subprime segment hit a 10-year low in the first quarter. Subprime financing remained near record lows in the second quarter as well, according to the firm.

Asked for his insights, Orlando said he sees the tighter standards as a regional concern and said he still expects a “significant uptick” among all buyers in hurricane-affected areas. Palmer said improved relations with their finance sources should be the goal of every dealer working in the subprime space.

“Most lenders will look at two or even three bureau scores,” he said, referencing a recent study showing that scores are more likely to vary from one report to the next in the lower credit tiers. “The difference in closing ratio between 639 and below is about 22%. In 640 and above, it’s about 65%. … Most lenders will look at another score, but only if asked.”

The GM Mandate

EcoProProducts’ Jerry Biller said anything less than a forceful response by dealer associations to General Motors’ disclosure policy regarding the sale of non-GM service contracts could embolden other manufacturers to attempt to limit consumers’ freedom of choice. The Warranty Group’s John Luckett called the policy ‘draconian.’ 
EcoProProducts’ Jerry Biller said anything less than a forceful response by dealer associations to General Motors’ disclosure policy regarding the sale of non-GM service contracts could embolden other manufacturers to attempt to limit consumers’ freedom of choice. The Warranty Group’s John Luckett called the policy ‘draconian.’ 

Luckett described GM’s new disclosure policy, announced in August, as “draconian,” particularly the factory’s threat to tear up franchise agreements, among other consequences, for those who fail to comply. He said he expects dealers and their associations to band together to fight it.

EcoProProducts’ Biller agreed, adding that anything less than a forceful response could embolden other manufacturers to attempt to limit consumers’ freedom of choice.

“I think that all product providers have to be cognizant of what the OEMs are doing,” Biller said. As the seller of a line of vehicle protection products marketed as environmentally friendly, he is accustomed to disclosures, including those that certify EPA testing. “Anytime there’s an environmental event that occurs anywhere around the globe, we see an increase in our sales. … The consumer’s going to develop a concern about mildew, mold, germs, bacteria.”

Biller further noted that his sales are in part driven by bundling and are backed by a mobile app car buyers can use to submit claims. He argued that the introduction of such benefits, which demand a spirit of innovation and partnerships with third parties, represent the best qualities of an open market.

“The warranty should be there and should be sold. As a dealer, you want to have the confidence the product will do what it’s telling the consumer it’s going to do.”

Beyond Silicon Valley
Arroyo next turned to the always-touchy subject of digital retailing, particularly online F&I. Turning to 700Credit’s Lettis, he asked whether adding F&I products to digital retailing platforms was a natural extension of the online process or a dire threat to the F&I manager’s livelihood.

ProCredit Express’ John Palmer said he is a ‘big believer’ in digital retailing. However, he dismissed as uninformed many of the claims put forth by Silicon Valley engineers who have ‘never sold a car,’ described high-income, high-credit score, high-down payment car buyers as ‘maybe one-tenth of 1% of the market,’ and said the remaining majority need human intervention to get financed. 
ProCredit Express’ John Palmer said he is a ‘big believer’ in digital retailing. However, he dismissed as uninformed many of the claims put forth by Silicon Valley engineers who have ‘never sold a car,’ described high-income, high-credit score, high-down payment car buyers as ‘maybe one-tenth of 1% of the market,’ and said the remaining majority need human intervention to get financed. 

Lettis said he was tracking the progress of dozens of sites, all built to answer car buyers’ concerns about the current sales process. “A small percentage of them are now trying to jump into the F&I side, which I believe they will be able to do. As the other online consumer sites start to see this, I think more of them will jump in.

“It’s a viable option. They’ve seen it work in other industries,” he added, listing the mortgage and insurance industries as examples. Asked whether F&I managers should be nervous, he said they should, but “there should also be hope, because, with this online F&I process, there’s really no reason why any dealer — whether it’s an independent or a franchise dealer — could not compete with online.”

Dealers have built-in advantages, Lettis explained, such as control of their inventories and relationships with any number of finance sources and product providers. All Amazon and Google, which he said pose the greatest threat to dealers, can hope to do is attract curious car buyers, send them to dealerships, and hope to make money in the process.

“The key for dealers is trying to keep their own customer and be able to offer this improved process, get away from this four-hour beatdown, and compete with the 30-minute or 60-minute sales cycle,” he said. “And they can do it.”

Palmer described himself as a “big believer” in the digital retail experience. However, he dismissed as uninformed many of the claims put forth by Silicon Valley engineers who have “never sold a car in their lives,” described high-income, high-credit score, high-down payment car buyers as “maybe one-tenth of 1% of the market,” and said the remaining majority need human intervention and counseling to get financed.

“Could anybody here imagine that you’ve got a customer in front of you — just sold the car — and you turn your computer around to your Dealertrack or RouteOne app, and say, ‘You know what? I’m hungry. I’m going to check to see if there are any doughnuts left. Would you mind filling this out and hitting “Submit” for me?’”

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