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Finance

Unlocking Profits Through Financial Literacy

August 2008, F&I and Showroom - Cover Story

by Steven Palmieri

F&I Manager: Boss, I just tried to rehash this deal and the lender will not buy it. They are overly cautious because of their increasing default rate. The lender is telling me the customer's credit score is too low for them to override the system decline.

Finance Director: Unbelievable. We sent them a million dollars in paper last month. I guess I'm going to have to tell our GM that we have to let the customer walk since the lender won’t bypass its scorecard.

The situation described above is playing out in dealerships across the country. Finance managers are spending hours each day rehashing

and restructuring deals in order to move a unit while lenders are fighting tighter lending criteria and decreased access to capital. Even if a deal is made, gross profit is often sacrificed in order to make the loan-to-value (LTV) structure match the lender approval. Even more frustrating is having an F&I manager exhaust all of his or her efforts just to have the customer turned down by every lending source.

Navigating through today's credit system not only takes persistence, but also a high level of financial literacy in order to unlock profit opportunities. This starts by understanding that credit laws can be

open to interpretation, whether it is the dealer, lender, consumer, credit bureau, or a company that creates the empirical mathematical scoring model (such as Fair Isaac and Company (FICO)).

Take section 602(a)(1) of the Fair Credit Reporting Act (FCRA), which states: "The banking system is dependent upon fair and accurate credit reporting. Inaccurate credit reports directly impair the efficiency of the banking system, and unfair credit reporting methods undermine the public confidence, which is essential to the continued functioning of

the banking system."

Understanding what "fair and accurate" means depends on one's interpretation. Credit is too fluid of a concept for most people to fully understand. In simple terms, credit is the granting of a loan and the creation of debt. This is where the simplicity of the credit system ends, the logical understanding of credit stops, and the analytical interpretation of credit laws begins.

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