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With the Consumer Financial Protection Bureau cracking down on dealer reserve, at least two of the nation's biggest franchised dealership groups say they wouldn't be hurt too badly if the CFPB forces lenders to switch to flat fees instead.
Group 1 Automotive Inc. and Lithia Motors Inc. say that, on average, they already get roughly half of the finance portion of their per-vehicle F&I revenue from flat fees as opposed to dealer reserve.
"It's about half," said Pete DeLongchamps, vice president of financial services and manufacturer relations, in a phone interview last week, referring to the mix of flat fees vs. dealer reserve.
His remarks, and similar ones earlier by other publicly traded dealership groups, indicate that those companies' earnings are not reliant on dealer-reserve revenues.
All told, about 17 percent of Group 1's F&I revenue came from dealer reserve in the first half of 2013, the company said. About 15 percent came from flat fees. The vast majority, about 68 percent, came from F&I product sales.
That puts Group 1 in roughly the same boat as Lithia. During a conference call in July to review second-quarter results, Lithia CFO Chris Holzshu said, "Half our transactions are already on a flat-fee basis."
Several publicly traded new-car dealership groups also have stressed in recent quarterly reports that they are working harder to sell more F&I products to avoid pressure on dealer reserve from the Consumer Financial Protection Bureau. However, the other groups haven't broken out how much they earn from flat fees.
The CFPB wants lenders to switch to flat fees so as to eliminate dealer discretion in setting customer interest rates. The CFPB maintains dealer discretion can lead to discrimination against legally protected classes of borrowers, such as minorities or women. The National Automobile Dealers Association says its members don't tolerate discrimination.
|Group 1: Flat fees, dealer reserve about equal|
|Group 1 Automotive said on average, it gets nearly half of the finance portion of its per-vehicle F&I revenue from flat fees, for instance, from subvented loans or credit unions. The rest comes from dealer reserve. The company said that makes it less vulnerable if regulators force lenders to switch to flat fees across the board. Figures are for U.S. operations only.|
|F&I revenue per retail unit|
|1st half 2013||Share of total|
|Subtotal product sales||$920||68.4%|
|Total F&I per retail unit||$1,345||100.0%|
|Source: Group 1|
It's unusual for dealership groups to provide so much detail about their F&I results. Lithia and Group 1 disclosed the numbers to support the argument that they are less vulnerable than it appears if the CFPB forces lenders to switch from dealer reserve to flat fees. The message to Wall Street and investors would appear to be: Don't worry about the CFPB's policies hurting us.
In answers to questions from analysts during second-quarter conference calls, several large dealership groups said they were not aware of any major auto lenders switching to flat fees. Lithia's Holzshu said he knew of only one small lender that had switched from dealer reserve to flat fees. That lender accounted for "I think, 10 deals for us, year to date," he said.
DeLongchamps said dealerships often don't have the opportunity to add dealer reserve. That could happen, for instance, when there are factory incentives in the form of advertised, cut-rate interest rates or when consumers get a loan directly from a credit union.
Group 1 ranks No. 4 on Automotive News' list of the top 125 U.S. dealership groups with retail sales of 128,550 new vehicles in 2012. Lithia ranks No. 9 on the list with 56,960 new vehicles sold at retail in 2012.