Who will be in the driver’s seat on the road to recovery? Dealers? Lenders? That was the main question filtering throughout the 2010 F&I Conference and Expo, a stark contrast to the mood heading into last year’s show when the collapse of Lehman Brothers, Fannie Mae and Freddie Mac signaled the start of what is now being called the Great Recession.

“A year ago, when I was in my room preparing for a panel discussion for this show, I was watching on television what was a marked day in the banking meltdown,” said Alex Sarafian, director of consumer credit for GMAC. “I never could’ve dreamt what that would mean for me as an employee of GMAC in the roller coaster that we were about to go on.”

A lot has happened since that time, from the disappearance of the asset-backed securities market to the scarcity of floorplan dollars. The industry also lost several key players, such as HSBC, Triad and Compass Bank, and saw credit-union market share surpass that of captives. And the incentive of choice in 2009: unemployment opt-out programs.

Joined by representatives from TransUnion, Experian Automotive, law firm Path Lewis LLP, Resource Automotive, and Smart Payment Plan, Pete Biscardi, president of NAC, reminded attendees that while the country has experienced 13 recessions, it has also experienced 13 recoveries.

 

Finance executives did offer some positives, but said the massive shift in auto finance this year has made it difficult for finance sources to predict loss. It’s one of the reasons why dealers can expect more deal verification, and why lenders will continue to monitor the performance of dealer loan portfolios.

Sarafian talked about GMAC jump-starting leasing for General Motors and Chrysler, and the company’s efforts to rebuild its dealer relationships. Chase Auto Finance’s Paul Rule talked about the rise of the company in the automotive segment — which sat in the No. 1 spot in Experian Automotive’s top 20 list of new-vehicle financing — noting how the company is now acting as the captive for Subaru, Land Rover, Jaguar and Mazda.

“It never gets as bad as it does in the housing or the credit card business,” he said. “We have suffered considerably in those products, yet we continue to make profits in our auto portfolio, not at hurdle rates, but it’s still a business we’re committed to.”

Executives made it clear they’ve moved from a sales focus to an operational focus, which has put serious pressure on dealer back-end profitability and maximizing reserve retention. The one positive, they said, is the industry no longer faces the liquidity issues seen in the first quarter.

Charles Aiesi talked about the flood of floorplan requests Honda Financial Services (HFS) has received and said the company is in a good capital position to respond. “We strategically were able to gain the capital that we needed,” he said. “In turn, we’re able to support many of the dealers’ requests on a must-need basis first.”

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Aiesi also said the company is in phase two of its three-phase launch of Acura Financial Services, and said the company is developing products that will differentiate its new venture from HFS and other captives in the luxury segment.

Wachovia Dealer Services’ Adam Pope talked about the possibility of new finance companies entering the market in the next year. “We’ve already started to hear some companies trying to form,” he said.

Pope talked at length about the company’s recent history, including Wells Fargo’s purchase of Wachovia last October. He also commented on the prospect of Wachovia adopting the Wells Fargo name, saying that the indirect business model that put Wachovia in the No. 2 spot on Experian’s top 20 lender list will remain. He added that the two companies are working to combine their commercial lending business units, which he said will be managed by Wachovia’s management team.

Executives also commented on the shot in the arm that was the Cash for Clunkers program, some claiming banner months for July and August. “We were surprised by the quality of the customers that came in the door,” said GMAC’s Sarafian. “I think it really was people on the sidelines.”

Manas Mohapatra, a staff attorney with the Federal Trade Commission, leads a 45-minute question-and-answer discussion on the Red Flags Rule during a special lunchtime address.

 

Keeping the Momentum Going

While Cash for Clunkers pushed the seasonally adjusted annual rate for vehicle sales to 14.1 million in August, the industry entered the show with predictions that the SAAR would drop to 8 million in September. But that’s not what industry insiders were focused on.

“I’m no economist, but there are plenty of positive signs,” said Tom Murray, president of Resource Dealer Group. “Cash for Clunkers provided us with a clean slate, so it’s up to us to take a position of reinvention.”

During his keynote address, DealerTrack’s Mark O’Neil showcased a host of slides pointing to the positives ahead. In one slide, he showed a graph tracking vehicle turnover rates during the last seven recessions. In most cases, spikes in vehicle life were followed by steep declines. The only concern this time around is the turnover rate is no longer hovering around 10 and 15 years, as it is now approaching 25 years.

Aside from the turnover rate, the return of the credit markets will be another key to the industry realizing forecasts of 11.2 million vehicles sold next year and 14.7 million in 2012. And according to O’Neil, who said approval rates across the credit spectrum are climbing, the industry is headed in the right direction.

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“We got a ways to go, but we’re on the right track,” O’Neil said.

Quoting a stat showing that 75 percent of new-car buyers — 62 percent for used — utilized the Internet to research and shop last year, O’Neil made it clear the importance of the Internet in the industry’s recovery. He added that communicating with today’s mobile-device wielding consumers will also be key, with shipments for these devices expected to match computers by 2011.

Richard Ackman of Columbus, Ohio's Germain Motor Company comments on how the industry needs a culture change, saying that dealers need to get better at setting and achieving realistic action plans.

 

Future of F&I Still in View

The future of the F&I manager also took center stage. And while all agreed that the loss of the F&I office would be catastrophic, panelists said reinvention of the office is needed.

“If I gazed into the crystal ball, could I see a dealership operate without an F&I office? Possibly, but I can’t see a dealership functioning and making the money it needs to make without these specific functions being handled in some office,” said Alan Miller, a senior executive with CNA National Warranty Corp.

Miller said the industry continues to develop new ways to deliver products and increase acceptance rates, and echoed the importance of the Internet in achieving those goals. “With the Internet, everyone seems to be nervous,” he said. “We think the Internet will result in a benefit for the industry, because the more people know about the industry and about service contracts, the more they’ll accept them.”

Patrick DeMarco, president of Ristken Software Services, said the service drive and direct marketing represent key growth areas for service-contract sales. “We all see more and more direct marketing of service contracts after the initial purchase of the vehicle,” he said. “So, while I see the traditional F&I process being strong, it is apparent that there will be alternative ways to purchase service contracts.”

Panelists also talked about more targeted plans, as vehicles become more complex and as manufacturers continue to stretch out warranties.

On the GAP front, Jeff Jagoe, an executive with Innovative Aftermarket Systems, said the industry continues to work on converting insurance states to waiver states. He also hinted at a possible new business model for the category. “I think we’re going to see GAP rates as a Mercedes being this price, Toyota being that price,” he said. “I see heads nodding, and that’s OK, as long as we’re all going the same way.”

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As for tire-and-wheel products, as well as etch, price discounting continues to threaten the viability of the two categories. “Frequency is climbing and many companies are looking at a rate increase, which means the product will look different in the future,” said Resource Dealer Group’s Ash Bauer. “What a lot of our dealers are doing is setting specific prices on those products that F&I managers can’t deviate from.”

Combo products and their impact on F&I revenues were also discussed, with Jagoe saying the category is at the forefront of the F&I office’s evolution. The impact of biweekly payment programs also took center stage, with Ristken’s DeMarco predicting that service payment plans will be the next big thing. “Certainly, the evolution of biweekly payment products has hit the market,” said DeMarco. “I think another area where we’re going to see an increase is with service payment plan options.”

 

Compliance experts Terry O'Loughlin, Gil Van Over and Bob Harkins provide attendees with a regulatory reality check during their "Create Your Best Chance Deal" panel discussion.

 

Regulatory Environment A Concern

While it was clear the industry was ready to move forward, Reynolds and Reynolds’ Terry O’Loughlin, gvo3 & Associates’ Gil Van Over, and compliance consultant Bob Harkins reminded attendees of still another threat: compliance.

“As consumers become more and more desperate ... the more and more dealers are going to be pursued by the ‘dark side’ to try to help consumers get out of the situation that they got themselves into,” said Van Over.

O’Loughlin listed off a host of threats to the industry — from 43 attorneys general signing a letter demanding a change to the Buyer’s Guide, to the possible establishment of two commissions that would further police the financial services industry.

“In March of this year, President Obama signed a major omnibus appropriations bill, which empowered state AGs to enforce the Truth in Lending Act. That doesn’t sound so sinister on the surface, but the reality is that it has been the Federal Trade Commission who has enforced the law,” said O’Loughlin. “What does that mean? Well, it means AGs are going to be turning their attention to how you prepare your documents.”

If the specter of increased regulations and policing of the industry isn’t motivating enough, panelists said getting finance source’s back in the driver’s seat should. “I started in this industry at Ford Credit,” said Van Over. “And I can tell you that even back then, and especially today, lenders know who the kinks are in the industry. They know which finance manager they can trust and which ones they can’t.”

About the author
Gregory Arroyo

Gregory Arroyo

Editorial Director

Gregory Arroyo is the former editorial director of Bobit Business Media's Dealer Group.

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