When sales managers are permitted to cut F&I out of the offer, profits decline and customers experience undue risk.
When I started my career in the car company nearly 30 years ago, the position associated with F&I was, in my opinion, hands down, the very best job in the store. Sure, the general manager ran the dealership, but there was clearly something so alluring about F&I. Becoming an F&I manager became my obsession plus, in large part, my passion for a lot of my adult life.
Back then, finance directors sat at the back of the dealership, reviewing stacks of offers, crunching numbers, and speaking with banks. As a young salesman, I might sit and listen to calls along with buyers and marvel at what sort of short conversation about credit recommendations and deal structure could change the decision from “declined” to “approved.” I thought finding out how to “hang paper” was the best part of the job.
Customers and F&I managers had often been friends that helped one another hit goals. Accordingly, decisions had been about program knowledge, how to make the deal “fit,” plus factors greater than just one deal.
As an F&I supervisor, I valued my buyers plus wanted them to succeed. When I talked with marginal or subprime clients who felt extra risky or even displayed an indifference toward repairing their credit, I would place those loans with a finance source that could welcome the risk rather than one that wouldn’t see it coming. I’d just hang the deal somewhere else, even when it meant losing a few bucks. The relationship was simply more important.
As a young salesman, I actually once watched a mentor associated with mine send 70-plus deals to the captive finance company, which was not really our normal practice. His favored source had refused to buy an offer he “spotted” on them. This might sound crazy, but it worked, plus it allowed us to roll six hundred units a month with very quick deal times before internet portals actually existed.
It was amazing to watch the combination of leverage, finesse, knowledge of programs, and relationships that great F&I directors and managers had with their banks. They were more than “another closer”; they were the conduit between the car dealership and the money. During this time, a quality F&I manager could not only add units and gross, they could actually change the entire culture of their car dealership.
A Change in the Balance of Power
An easy way to see who else controls society is to look at the owner of the biggest buildings in town. For thousands of years, towns were ruled by governments and churches. Accordingly, the skyline has been decorated with castles, courthouses, in addition to cathedrals. Today, you can look at any kind of metro skyline or Main Road in America and you’ll see that the biggest buildings belong to the banking institutions. The banks also control the majority of the money, which is a necessary ingredient for virtually any successful F&I department.
True captives create a room for dealers that often keeps competitors healthy through programs designed specifically to move units. Even if the captive is just part of a big bank, the manufacturers still have some leverage in keeping the particular programs favorable for their dealers. If not for this system, it’s likely there are higher interest rates for everybody, which in turn, might slow car sales: Higher prices equals higher payments, slower customer equity, and longer trade process.
Fortunately for us, captives were formed to help move cars a very long time ago.
In 1919, General Motors didn’t rely on outside banks. Rather, they saw the need (and opportunity) to become the bank in the automotive deal. So GM formed General Motors Acceptance Corp., better known as “GMAC” (1919– 2006 R. We. P. ), which drove GENERAL MOTORS sales forward for decades. Imagine if GM had only relied upon outside banks during the Great Depression that began in 1929. The entire idea of the F&I department as you may know it may have died as a result.
In 1932, the Glass–Steagall Act was enacted to avoid another crash, and it worked perfectly. The law prevented investment banks from holding deposits, such as savings accounts, IRAs and 401(k)s. The law furthermore prevented investments from being made by commercial banks with your money.
Regrettably, in 1999, Congress voted to repeal the law. This change allowed the merging of industrial and investment banks, which led to billions of dollars’ worth of people’s IRAs and 401(k)s being used for investments by the banking institutions themselves, eventually requiring a $700 billion bailout in 2008.
Initially, the merger associated with investment and commercial banking grew to become a big money business. It was attractive to work for a bank. Banks had been posting enormous profits and professionals enjoyed cashing the corresponding paydays. But, like all public businesses, they wanted more.
As the Great Recession approached in the late 2000s, banks were searching everywhere for more profit, and it had been nearly impossible to find. That’s until a few savvy finance sources started to outsmart their dealers by circumventing F&I when they could.
With portals such as Dealertrack and RouteOne completely solidified into the dealership and pressure through customers and staff to reduce deal times, sales managers began publishing deals at the desk. This exercise, while intended to help transaction speed, had an unintended side effect: It had taken structure and finesse out of the preliminary deal submission.
Today, rather than have sales review the offer with F&I and maybe have the F&I manager on a TO early in the deal, many simply moved forward with whatever the financial institution was willing to give.
The art of crafting deals, working relationships, and rehashing began to fade. Nowadays, in many dealerships, it’s essentially gone. The dealership culture has suffered as a result. Many offers are just cut by sales supervisors upon receipt of the first green checkmark or counteroffer instead of working the deal.
For banking institutions, it’s more about algorithms and formulas. This new auto finance model is also a very easy method to ensure they only get clean business because they can move particular parameters, at will, to achieve their targets. Asking your buyer to extend on a deal is often met along with, “I can’t. The computer won’t let me.” Which may be the case, but not always.
If your loan portfolio is performing, that’s ideal for your source. But it also needs to be ideal for your store. Otherwise, it’s just a one-way relationship. Ask anyone in your store how the “book of business” is performing — whether by application count, volume, yield, or delinquency. They probably won’t understand, and many banks won’t want to discuss it — except if it’s bad. In other words, the majority of dealers and F&I company directors don’t know whether the financial institution is profitable on your business or not. But you should!
We can say that lenders must expect some delinquency and some defaults. If the paper they may be buying from your store is performing perfectly, this is actually a red flag. There are debts that are not repaid. It’s standard economic theory.
Think about this: A perfect portfolio means that the finance source might only be buying the good loans and passing over the marginal ones. This is an issue. This means that, a certain percentage of the time, you’re missing opportunities for approvals and more favorable callbacks.
How does this affect your own store? How about lower sales, lower morale, lower F&I profits, lower customer satisfaction, and lower service department revenue?
I suggest all dealers have a hard look at who is allowed to post and rehash deals. If the “profit prevention manager” is calling in your paper, it will cost you a lot.
Also, I believe dealerships ought to routinely review their lending relationships. This requires meeting with each of your own sources, asking questions about their particular programs, and finding out how your business with them is performing. Learn which will partner with you to ensure your achievement. Who has flexibility built into their programs? Who will stretch for your deals as needed?
It’s important to find out where mutually beneficial relationships exist. Right now, I’m seeing too many dealers battling for profit while margins continually get smaller.
Lloyd Trushel is a 28-year veteran from the automotive business and co-founder from the Consator Group, an F&I development company specializing in customized training solutions.