Limiting F&I Income

You have probably read about the consent order between the federal government and American Honda Finance Corp. AHFC agreed to repay $24 million to minority buyers to settle a Department of Justice complaint arising from acquisition of customer finance paper from dealerships. The critical part of the consent order, however, is the agreement by AHFC to cut caps on dealer participation. Dealer participation cannot exceed 125 basis points for retail installment sale contracts for sixty months or less and 100 basis points for RISCs of longer duration. This both confirms the goal of, and indicates a significant shift by, the government in its attack on dealer Logo1_horizontal-lockup_@2participation.

In March 2013, the CFPB rocked the auto dealer finance world with its memo to the big banks under its jurisdiction. The CFPB imposed herculean duties on the financial sources with the clear signal they could escape those obligations by imposing flat fees. Despite its denials, CFPB’s objective to limit dealer earnings from financing was obvious to everyone but the most dedicated CFPB cheerleaders.

The CFPB miscalculated the resolve of the dealer body. Led by a strong campaign from the National Automobile Dealers Association, dealers pushed back. Except for two banks, the CFPB’s push toward its goal of requiring financial institutions to impose flat fees has been thwarted.

The AHFC consent order signals a change in tactics. In a recent meeting with the Minority Auto Dealers Association, representatives of the CFPB and the Department of Justice indicated that they would have flexibility in how compliance by dealer finance sources can be achieved, mentioning specifically reduction in caps on dealer spread. The AHFC consent order is an example of that. If anyone missed the message, the U.S. Department of Justice issued a statement urging other captive finance sources to follow AHFC’s lead in limiting dealer finance participation

The federal government will not easily back off its campaigns to limit dealer finance income. Dealers must try to protect their legal position if a challenge occurs. The most effective thing a dealer can do is to put in place a fair lending program eliminating rate discretion in the F&I department by establishing a spread from which deviations can be taken only for specific non-discriminatory reasons. A dealer should consider the program of the National Automobile Dealers Association, but many F&I service companies provide similar programs. Implementation of a program, training, review, retraining, and disciplinary action for those who do not comply are critical.

Given the possibility of other finance sources severely restricting finance participation, such a program is not important just for compliance reasons, it is important for production reasons. A program followed by personnel in the F&I department will prevent shortcuts. Every F&I person must present financing at the established spread to every customer. Dealers who have already put these programs in place have experienced increased rate production across their portfolios.