Though profits may have soared initially for dealerships due to social and economic changes, something may be lurking
beneath the water. Looming waves will eventually hit the F&I departments across America’s dealerships.
Despite the presence of a few rain clouds on the horizon, it is not yet time to put away the sunglasses. Lenders and F&I offices have demonstrated their tenacity. So far, they have survived the pandemic and are dealing with labor and component inflation and rising interest rates. While adverse publicity may boost calls for increased government supervision, the consequences have been negligible thus far.
All six publicly traded car dealers reported double-digit growth in revenue from car loans and finance-and-insurance packages in the second quarter compared to the previous year. And five of the six made more than $2,000 in gross profit per vehicle. Younger purchasers who are concerned about the environment may be attractive candidates for service contracts.
However, there are worries about several proposed changes to how lenders and F&I offices now work and how this may affect business.
Much has been said and written about the FTC's proposed reforms, particularly those concerning GAP coverage. Dealers and groups such as the National Automobile Dealers Association have called the proposed additional requirements unnecessary, excessive, and destructive to the consumer experience. The NADA and other organizations requested that the FTC extend the deadline for public comments, but the FTC declined.
Changes to the Safeguards Rule, which are slated to take effect in December, are also on the horizon. While lenders and dealerships scurry to prepare for the new restrictions, some request extra time.
If you haven't heard, new laws being considered could include auto lending as part of the Community Reinvestment Act, resulting in enhanced scrutiny of banks with big vehicle loan businesses.
Away from the regulatory front, lenders and dealership F&I departments must continue to adapt to changing customer expectations, particularly younger consumers who demand a more digital experience. Also, make certain that all offers are presented to clients.
The largest banks are scheduled to report earnings, and we'll learn how their auto lending operations fared in the most recent quarter from those reports. We're already witnessing the effects of inflation and macroeconomic volatility, with J.P. Morgan Chase reporting that vehicle loan and lease originations were $8.4 billion in the first quarter, down from $11.2 billion the previous year, compared to the increase in profit that the 6 publicly traded dealerships have shown.
Other platforms, such as CarMax, revealed in their most recent results that their net loans originated in the most recent period totaled $2.44 billion, a slight decrease from the $2.48 billion recorded a year ago. That lackluster activity contrasts sharply with Federal Reserve figures showing that vehicle loans climbed by $11 billion in the first quarter, bringing the total to over $1.4 trillion. The sprinkling of data signals suggests that there may be a natural decline in loan demand, and underwriting will likely grow more stringent in this situation. However, certain patterns appear to be unstoppable.