SALES DRIVER: 6 NE W SALES TIP S | MAD MARV: SQUISHING THE FLEA | LEGAL: F TC ON THE HUNT
A BOBIT PUBLICATION FI-MAGAZINE.COM
FIRST LINE OF Learn Why Experts Believe the New Risk-Based Pricing Rule Could be a Blessing in Disguise
-READY Chacon Auto’s Gary Chaney and Two Other Dealers Discuss How They’re Navigating the World of Online Reviews
THE
COMEBACK
Experian Automotive Says Auto Finance Surged in 3Q2010 — Even for Below-Prime Buyers JANUARY 2011 $10.00
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Contents
Endorsed as the official publication of the Association of Finance & Insurance Professionals
January 2011 Volume 14, Number 1
Features Technology
12 Your Online Reputation Word of mouth has always been the dealer’s best marketing tool, but the Internet age has changed the rules. Find out what dealers are doing to regain control of their reputations. Auto Finance
12
16 Doors Open for Below-Prime Buyers In the third quarter, subprime originations increased for the first time since the credit crisis. Auto finance analyst breaks down the results. Compliance
22 First Line of Defense Karina Grile worked overtime to get Voss Auto Network’s stores in line with the industry’s newest rule — one that experts say could be a blessing in disguise.
26
Q&A
26 Getting Resourceful The magazine catches up with The Warranty Group’s Michael Frosch to discuss F&I, automotive retailing and the road ahead. Special Finance
28 Direct Mail Mounts a Comeback
28
Mailers were the first line item scratched from many dealers’ advertising budgets during the downturn. Marketing ace says it’s time to add them back.
Departments 4 Letters 6 Editorial Page 8 Developments 30 Sales Driver 31 Mad Marv 32 Legal 35 Bottomliners 37 Ad Index 40 Industry Trends
22 F&I and Showroom (ISSN 2154-1728) (USPS 018-706) (CDN IPM# 40013413) is published monthly, by Bobit Business Media, 3520 Challenger Street, Torrance, California 905031-1640. Periodicals Postage Paid at Torrance, California 90503-9998 and additional mailing offices. POSTMASTER: Send address changes to F&I and Showroom, P.O. Box 1068 Skokie, IL 60076-8068. Please allow six to eight weeks for address changes to take effect. Subscription Prices: United States $20 per year; Canada $35 per year; Foreign: $35 per year. Single copy price: $10; Fact Book: $30. Please allow six to eight weeks to receive your first issue. Bobit Business Media reserves the right to refuse nonqualified subscriptions. Please address editorial and advertising correspondence to the executive offices at 3520 Challenger Street, Torrance, California 90503-1640. The contents of this publication may not be reproduced either in whole or in part without the consent of Bobit Business Media. All statements made, although based on information believed to be reliable and accurate, cannot be guaranteed and no fault or liability can be accepted for error or omission.
2 F&I and Showroom January 2011
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Letters Complying With the RBP Rule After reading Michael Benoit’s column (“The Exception Is the Rule”) in the December issue and then reading all 200-plus pages of the Risk-Based Pricing rule, I noticed the FTC kept saying, “Final rules apply to any person that uses a consumer report in connection with …” If I don’t pull a bureau on a customer, am I exempted from both types of notices? There are several of us F&I folks out here that do not pull bureaus. We merely send the credit application to our lenders. TO THE EDITOR:
Michael Wilson Finance Director
What you have to remember is that pulling a credit report isn’t the trigger point for the rule. It’s the act of applying for credit. Now, in a twoparty situation like you asked about, your dealership is acting as an agent for the finance source that engages in direct auto financing. That means your dealership may be called upon to provide your consumer applicants with a credit score disclosure notice on behalf of the finance source. So, you may want to contact your finance sources to ask how they will comply with the rules. — Gregory Arroyo
Advertised Price vs. Selling Price TO MICHAEL BENOIT: I’m a big fan of your column and was hoping you could answer a question for me. Most dealers use a third-party service like Dealer Specialties or AutoUplink to pull their used-vehicle inventory and feed it to the dealership’s Website and used-car portals like Autotrader. com, Cars.com and others. Now, my understanding after reading the FAQ section on the Federal Trade Commission’s Website is that the same rules that apply to traditional advertising apply online. So, if a dealer has a vehicle listed online and a customer visits the store not knowing the price advertised on the Web,
would it be a violation if the customer pays more than the price advertised online? I would appreciate any comments you can make. Eric Damiani Great question, Eric. The answer is that if you advertise the price (regardless of where you advertise it), you cannot sell it for more than the advertised price. One caveat may be if you limit the amount of time the price is available, e.g., “This price is good through Dec. 2, 2010,” and treat it as a limited time only discounted price. Otherwise, if the advertisement is out there without a limit on the timeframe for which the price is good; don’t sell for more than the advertised price. You’ll never be able to know for sure whether your shopper is aware of the advertised price, so the best practice is to assume he or she is aware. You’ll be happy you did if your customer turns out to be a FTC mystery shopper. — Michael Benoit
F&I Menu for Fleet Sales
Vice President Group Publisher, Auto Group Sherb Brown Publisher, Dealer Group National Sales Manager David Gesualdo 727-947-4027 david.gesualdo@bobit.com Executive Editor Gregory Arroyo 310-533-2592 gregory.arroyo@bobit.com Managing Editor / Art Director Tariq Kamal 310-533-2470 tariq.kamal@bobit.com Senior Editor Justina Ly 310-533-2496 justina.ly@bobit.com Great Lakes Sales Manager Robert Brown Jr. 248-601-2005 rbrown8799@aol.com Sales & Marketing Coordinator Tracey Tremblay E-Media and Print Production Manager Brian Peach 310-533-2548 brian.peach@bobit.com Web Manager Sam Kim 310-533-2492 sam.kim@bobit.com
I just read your November column (“The Slump Cure”) and the one thing that caught my eye was what you said about the menu. I work for an outfit that’s strictly a commercial dealer, where walk-in and show-floor traffic is non-existent. Everything is outbound and we don’t currently use a menu. Do you have any menu and best practices recommendations for a gig like mine?
TO “MAD” MARV ELEAZER:
Mike Johnson Commercial Business Sales and Leasing Boyer Trucks Minneapolis
Thanks for the note, Mike. I’ll be sending over some menu recommendations offline. In the meantime, I would suggest you utilize a process wherein the F&I department structures the menu and e-mails it to the fleet company’s purchasing agent. Then, you can make the presentation over the phone. — Marv Eleazer
Audience Marketing Manager Tony Napoleone
Chairman Edward J. Bobit President & CEO Ty F. Bobit Chief Financial Officer Richard E. Johnson Business and Editorial Office Bobit Business Media 3520 Challenger St. Torrance, CA 90503 Phone: 310-533-2400 Fax: 310-533-2503 Change Service Requested Return Address: Bobit Business Media PO Box 2703 Torrance, CA 90509 Subscription Inquiries 888-239-2455 BobitPubs@Halldata.com Printed in U.S.A.
4 F&I and Showroom January 2011
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Letter from the Editor
Customer Education Isn’t a Bad Thing It might seem like just another regulation targeting dealer-arranged financing, but the editor believes the Risk-Based Pricing Rule might be the kind of icebreaker F&I managers have been seeking all along. By Gregory Arroyo
I
wrote it last year and I’ll write it again: the Risk-Based Pricing Rule (RBPR) represents our chance to “uphold our job requirement.” I agree that you shouldn’t be held responsible for the financial education of your customers. However, just for a second, think about the doors a conversation about credit can open. Before we get into that, there’s one thing you need to understand about this new rule: The Federal Trade Commission (FTC) and the Federal Reserve Board (FRB) went out of their way to make complying with it as easy as possible. Think about it: You don’t have to evaluate the rate your finance sources offer your customers. Nor do you have to calculate the impact of your markup on a dealby-deal basis. If you did, then I’d understand why many believed this rule would be the death of F&I. But you don’t. In fact, all you have to do is present a credit score disclosure notice to every one of your customers who applies for credit. And don’t forget about the host of companies lining up to help you automate that process, as you’ll see on Page 22 of this issue. Will it add to your process? Sure, but let’s try to pull out some positives here. Take the dealer exception I just described, which the National Automobile Dealers Association lobbied for on our behalf. Did the FTC and the FRB have to listen? Did they really have to consider what goes on inside the dealership? No, they didn’t. The agencies also listened when dealers talked about how they might
not know the credit score their finance sources pull on their customers in cases of two-party financing. That’s why, if you’re handling the notice on your lender’s behalf, as the rule allows, you can use the credit score you pulled, even if it’s different from the one your finance source pulled on your customer. The FTC and the FRB also considered how you comply with the rule when it comes to telephone and In-
The notice is going to be a reality check for some of your customers. ... It could even represent a nice segue into why your customer may need your F&I products. ternet customers. They’re actually allowing dealers to figure out when it is “reasonably practical after the credit score has been obtained” to hand the notice to your customers. For outof-store customers, that could mean mailing the notice or handing it to the customer when he or she comes to the dealership to consummate the transaction — the rule specifies that the notice must be handed to the customer before that point. RouteOne recommends handing the notice to the customer after an approval decision is communicated to the consumer; but, again, it’s up to you to determine when it’s reasonably practical. Now, let’s think about what this rule is asking you to do — hand every customer who applies for credit a credit score disclosure notice. Yes, the
rule is set up so the customer, armed with his or her credit information, can walk out the door without ever buying a thing. But seriously, how many of your customers are really going to seek out better terms? I mean, the California state vehicle code the exception is modeled after has been in effect since January 2006, and I haven’t heard any complaints. But let’s think about this notice for a second. Can you think of a better way to introduce the F&I process to your customer than by handing them this notice? After all, it lets them know where they stand and that your F&I guy or gal can arrange for financing with one of the major auto lenders, local banks and credit unions — maybe even the one they already belong to. That’s one heck of a credibility builder, don’t you think? The new notice is going to be a reality check for some of your customers, especially for those below-prime customers bent on buying a vehicle you know they can’t get financed on. So, this notice may be your way to transition them into a more finance-appropriate vehicle. It could even represent a nice segue into why your customer may need your F&I products. Hey, you guys are the experts on the frontlines, so I’m sure you can figure out a couple of ways to use this rule to your advantage. Heck, I bet someone will even come up with a nice cash conversion technique that utilizes these notices. And that’s my point. It’s time we start making these rules work for us, rather than against us, and the RBPR is a great place to start.
6 F&I and Showroom January 2011 Au
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Developments Chrysler ‘Showcase’ Dealership Set to Open in Downtown Los Angeles VISITORS TO THIS YEAR’S L.A. AUTO
Show were treated to the debut of a number of new models and concept vehicles in the cavernous confines of the Los Angeles Convention Center. A few blocks to the south, another attraction awaited
The latest figures from TransUnion show that more U.S. car buyers are making payments on time and reducing their loan balances.
Sixty-Day Delinquency Rate Up in 3Q, Down for 2010
A The opening of Chrysler’s Los Angeles Motor Village will mark the Detroit Three automaker’s return to downtown L.A. after a 10-year absence.
visitors: a “showcase” dealership that will house all four of Chrysler LLC’s vehicle brands, as well as a Mopar-branded service center and a FIAT franchise. “The Los Angeles Motor Village goes above and beyond the traditional Chrysler Group dealership,” said Peter Grady, Chrysler Group’s vice president of network development and fleet. “Our customers will experience our brands in unique salons that reflect each brand’s identity and character.” Situated within sight of the Staples Center and convention center footprint, the dealership also will feature a five-story glass tower topped with three large LED reader boards that will house vehicles from all five brands. The tower faces the busy I-110 freeway, which hosts an average of more than 350,000 cars per day. The store is the site of a 1920sera Pierce-Arrow dealership, and its opening will mark Chrysler’s return to downtown L.A. after a 10-year absence. Chrysler officials planned to open the dealership this month. 8 F&I and Showroom January 2011
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seasonal hike in the rate of loans 60 days past due during the third quarter didn’t dampen TransUnion’s outlook for the new year, as the credit reporting agency says the year-over-year rate continues to decline. After a 9.4 percent quarterly increase in the 60-day delinquency rate, which stood at 0.58 percent in the third quarter, the Chicago-based credit agency said it expects the rate to be at 0.62 percent by the end of 2010. However, TransUnion expects the rate to fall to an even 0.60 percent by the end of 2011 — a 3.2 percent decline over the course of 2011 and a staggering 30 percent decline from 2008.
“This trend toward fiscal responsibility is reflected in year-over-year results, as auto delinquency rates now have dropped 28.4 percent since the third quarter 2009 — the largest decline since the summer of 2001,” said Peter Turek, a TransUnion executive. “On a state-level basis, 12 states experienced a drop in their quarter-toquarter delinquency rates, while only two states showed an increase on a year-over-year basis.” Additionally, average U.S. auto debt for 60-day borrowers fell from $12,643 to $12,500 between the second and third quarters and was “essentially flat” on a year-over-year basis; however, auto-loan originations were up 5 percent.
TD Bank Acquires Chrysler Financial
T
oronto-Dominion (TD) Bank Group and Cerberus Capital Management announced on Dec. 21 an agreement under which Chrysler Financial will be soldd to TD for cash consideration off approximately $6.3 billion. TD will take over Chrysler Financial in the United States and Canada, as well as the former captive finance commpany’s processes, technology and existing portfolio of retail assets. Following this transaction, the business — combined with TD’s current platforms in Canada and the U.S. — will be positioned as a Top 5 bank-owned auto lender in North America.
The acquisition is expected to close in the second quarter of TD’s fiscal 2011. Following the completion of the transaction, Chrysler Financial will conti continue to operate as a North Am American business headquarttered in Toronto. TD officials ssaid they expect to rebrand C Chrysler Financial under the T TD brand by spring 2011. ““It’s the foundation we need in the U.S.,” TD Chief Executive Ed Clark said on a conference call. “We needed franchises to generate assets, and this is an asset class that has held up well during the cycle. We can take this platform and grow it, and grow it a lot faster than we’re assuming.” TD BANK CENTRE PHOTO BY SCOTT PULSIFER
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Developments Volvo Adds CPO Maintenance Program
high-quality pre-owned vehicles, get higher resale value and compete with factory certification programs.
VOLVO CARS OF NORTH
America LLC has added a new maintenance package to its certified pre-owned warranty program. “Protection Plus+” offers factory-backed coverage on thousands of components, systems and operations, coverage for defective components for up to six years or 100,000 miles, roadside assistance, transferability between owners and a CARFAX Buyback Guarantee.
Columbus Ups Advance for NIADA CPOs COLUMBUS FINANCE INC.
will provide an additional 10 percent advance, or up to $1,000, on vehicles with the National
BofA Launches Car-Buying Site BANK OF AMERICA HAS
Northwood Graduates First Dealer MBA Class for the DeVos Graduate School of Management’s Dealership Executive MBA program received their diplomas during Northwood University’s commencement ceremony on Dec. 11, 2010. Introduced in 2008, the
DEMBA program, which attracted students from a host of dealerships and industry companies, including Manheim, Credit Acceptance, and Ford Motor Credit, is an MBA program designed specifically for the auto retail market.
Independent Automobile Dealers Association certified pre-owned warranty. Customers also will receive a 1 percent discount
on CFI’s program rates. Administered by NAC, NIADA’s CPO program aims to help dealers offer their customers
THE INAUGURAL CLASS
rolled out a new online shopping site for new and used vehicles that links prospective buyers to the bank’s certified dealers. The new Website, www.bankofamerica.com/carbuyingcenter, will provide consumers with an upfront price in writing, which will be honored by the more than 4,000 dealers certified by Bank of America. The site was created by Zag, a division of TrueCar Inc. and a provider of private-label online and mobile car-buying programs.
Moves and Hires NAC, a service contract sales and administration company, has hired Henry Paoli as the company’s new national business development manager. He will manage agents in Ohio and Michigan, recruiting new agents and focusing on current client relationships. He previously served as the southeastern U.S. regional sales manager for Warranty Solutions. In addition, NAC hired Paul Leary as its new national sales manager. Leary, who will also serve as a strategic relationship
manager, will be responsible for working with agents in the western U.S. and building on NAC’s recent expansion initiative. He previously served as the national sales director and business development leader for Warranty Solutions. JM&A Group, a provider of F&I and service-related products, has promoted Michael Stellmach to vice president of sales and operations. He will oversee and grow JM&A’s OEM relationships and manage the company’s reinsurance business and in-house training center. Stellmach has more than 20
years of industry experience and began his career at JM&A in 1999 as an F&I specialist. He recently served as division manager for the Georgia and South Carolina markets. Ford Motor Co. named K.R. Kent , former CFO of Ford Motor Credit Co., to the newly created position of executive director of investor relations. Kent will lead the OEM’s efforts to further strengthen the investor relations function. He will report to Ford Vice President and Treasurer Neil Schloss. Replacing Kent is Michael Seneski, former controller of global and U.S. marketing and sales. He will report to Mike Bannister, chairman and CEO of Ford Credit.
10 F&I and Showroom January 2011
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Technology
W
hen it comes to online reviews, the stories being told may not tell the entire story. Just ask the owners of Chacon (pronounced “CHAY-con”) Autos, a Dallas-based dealer group that lays claim to six used-vehicle locations and two Suzuki franchises in Texas. Gary Chaney, the group’s CEO, says customer satisfaction has always been the name of the game for the 60-year-old operation, and it has the awards to back it up. The dealer group earned Suzuki’s President’s Club Award in 2006 and 2007 for sales and service. The dealership also has been recognized by Baylor University and the Texas Historical Commission for its business success. It even made Inc. magazine’s list of the nation’s 5,000 fastest-growing private companies. “We like customer service,” Chaney says. “We even try to keep the same employees at each location, so when customers come in they see the same faces all the time.” The problem is, that’s not the story being told online.
tomers upset about their vehicle being repossessed. He understands their frustration, but says the reviews don’t tell the full story — especially considering the fact that nearly a third of the dealership’s sales come from repeat customers. “I’ve never had a lot of confidence in those [ratings], because I know our customers like us,” he says. “Thirty percent of our business is repeat customers. That’s what our business is built on.” Still, in today’s Internet age, Chaney knows his organization needs to get out in front of this new word-of-mouth medium. That’s what Chaney’s daughter, Stefani Musick, the dealer group’s controller, is now attempting to do. She recently established accounts on Facebook, Twitter and LinkedIn for Chacon Autos and says her goal is to use those platforms to market the dealer group, tout its vast inventory and distinguish it from the competition. “Right now we’re using social media to market ourselves, to get some followers,” Musick says. “I guess we’re still in the infancy stage, but, ultimately, it would be great to get some customer feedback.”
Word of mouth has always been the dealer’s best marketing tool, but the Internet age has changed the rules. Find out what dealers are doing to regain control of their reputations. By Justina Ly
Your Online A quick Google search reveals that the dealer group received an average of two out of five stars from 15 reviews. Customers either loved or hated Chacon Autos. Chaney says the reviews are the byproduct of working in special finance, a market the dealer group was founded on in 1950. Chaney points out that many of the less favorable reviews come from disgruntled cus12 F&I and Showroom January 2011
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New Media, New Management Tools
Reputation management is not a new concept to the industry. Manufacturers frequently track what consumers think of their vehicles and their franchised dealerships. Dealers also conduct their own surveys to learn more about the experience they offer consumers. The difference now is that consumers can broadcast what
they think via blogs, social networking sites like Facebook and Twitter and, in some cases, the dealership’s own Website. “Consumers have always talked about their experiences with brands and products,” says Jared Hamilton, founder of DrivingSales.com, a vendor rating Website. “Now, with the Internet, it’s in a public setting,” More consumers are turning to PHOTO BY DAVID JOHNSTON
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Confident in Chacon Autos’ longstanding tradition of stellar customer service, CEO Gary Chaney is willing to absorb the occasional negative review in the interest of serving Dallas’ special finance market.
by peer reviews, they still read them before making a major purchase. “People tend to seek out reviews when they are about to purchase a big-ticket item and they are reading the reviews to make themselves feel more comfortable with spending that money — like they have done their homework,” Forrester’s Reineke Reitsma wrote in a recent blog. “But, in the end, it’s their own judgment they rely on.” DrivingSales.com’s Hamilton says customer ratings and reviews in today’s social media world come in two formats: structured and unstructured. Structured reviews can be found on Websites such as DealerRater.com, a car dealer review site featuring more than 30,000 U.S. and international dealers. In these reviews, customers grade dealerships based on customer service, quality of work, friendliness, price and overall experience. It’s the unstructured reviews — in which customers discuss their experience at a dealership with friends on social networking sites like Facebook — that Hamilton says dealers need to pay attention to. “You need to be cognizant of how people are talking about you, even if they are not filling out a form,” he says. Some dealerships, like Chacon, choose to manage their online reviews in house, while others have turned to third-party vendors. Hamilton offers
e Reputation that public setting as part of the carshopping process. According to a recent J.D. Power and Associates study, about eight out of 10 new-vehicle buyers who turn to the Web visit at least one third-party site. One of the most popular sites for doing just that is Edmunds.com, which features customer ratings and reviews of dealership sales and service departments. A recent report by Cambridge,
Mass.-based Forrester Research also points to the impact rating sites are having on consumers. According to the study, 49 percent of male Internet users and 42 percent of female users consult ratings and reviews at least once a month. In contrast, 23 percent of males and 17 percent of females post ratings and reviews regularly. The study also found that, while consumers are not heavily influenced
a bit of caution to dealers who have opted to outsource their online efforts. “Social media didn’t exist at this scale three years ago,” he says. “These solutions are just being invented.” ADP Dealer Services and Reynolds and Reynolds both offer online reputation management solutions. Aside from monitoring social media sites, both companies’ solutions include consultation services that teach January 2011 F&I and Showroom 13
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Technology dealers how to handle negative commentary. They even offer recommendations for attracting positive brand awareness among consumers. Another company offering similar services is Riverside, Calif.-based eXteresAUTO. It offers a solution that aggregates reviews and complaints, tracks social media sites and sorts reviews based on keywords. The company’s trainers then go one step further, helping dealers organize the reviews and use customizable e-mail templates to send responses. Like anything that goes on at the dealership, Merla Turner, director of dealer training for eXteresAUTO, says success with services like hers needs to start from the top. “We know we’re dead in the water if we don’t get the owner or GM buying in,” she says. “It really does require a culture change at the dealership.” Finding the Right Vendor
When it comes to selecting an online reputation management company, DrivingSales.com’s Hamilton says dealers should be wary of companies offering to “improve” or “fix” their dealership’s reputation. They may not be able to deliver on that promise or, even worse, may provide unexpected and unwanted results. BMW of San Antonio learned that lesson the hard way. The store was caught with fake online reviews after an investigation by San Antonio’s ABC News affiliate, KSAT 12, revealed they came from a paid service. When reporters contacted the dealership’s general manager, John Bruns, he confirmed that the dealership hired a company called Review Boost to contact customers and generate actual reviews. He said the dealership also questioned the authenticity of the reviews after viewing them online, and had since canceled the service. However, Hamilton says instances like that will do little to curb the online marketing race. “People are social beings. Whether they talk face to face or online … they’ll always be talking about the industry,” he says. 14 F&I and Showroom January 2011
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After a year of soliciting customers to post favorable reviews online, George Grubbs Infiniti’s George Grubbs III turned to a third-party marketing company.
Three years ago, Randy Powell was tasked with creating a positive conversation about his dealership. Powell is the general manager of RBM Atlanta-North, a MercedesBenz dealership in Alpharetta, Ga., 22 miles north of Atlanta. The dealership opened in late 2007 — at the start of the recession — and faced an undeveloped market and stiff competition from other local high-line stores. “The first year we opened was a challenge,” he recalls. “[We had] no client base. We knew we needed a strong online presence.” After a few false starts, the dealership partnered with eXteresAuto. Powell says he made it clear to the company that he wanted authentic and genuine survey results, not just perfect fives across the board. He adds that he now has a firm grasp of how to handle negative comments. “We generally don’t try to rebut it, because it gives the comment a lot of prominence,” he says. “We also will adjust our templates to surround it with love and a lot of good reviews to make sure it’s not the most prominent.” So far, the approach has led to some positive results. “We have the most reviews and better placement than other stores,” says Powell, who adds that the dealership has managed to capture 20 percent of Alpharetta’s new-vehicle market and 35 percent of its used-vehicle market. Powell now has his sights set on fixed operations and is employing eXteresAuto’s tools to create e-mail campaigns he hopes will boost business for RBM’s service department. George Grubbs III, executive manager of Grubbs Infiniti in Euless,
Texas, managed his dealership’s online reviews before he outsourced the work to a third-party company. It was hard work: At the end of each month, he would compile a list of customers who returned favorable manufacturer surveys and contact them by e-mail. He would include hyperlinks to several highly trafficked Websites and ask the customers to post a review. “I did this for a year, and the result was very few [customers] taking me up on my request,” he says. “Instead, we got almost no good reviews and most bad [reviews were] from upset customers wanting to rant. There was no balance.” After doing some research, Grubbs turned to Advantix Marketing, a Dallas-based Web marketing company. “They take the same list I compile at the end of the month and call the customers to get permission to post a review on their behalf using their initials,” he says. “Only those customers they make contact with and get permission from get reviews posted. … It really is a clean process, one we could do in house if we had the manpower.” Providing great car-buying experiences has always been part of the game plan for Powell and Grubbs; they just needed to make a little investment to make sure the experience they offered was reflected online. “Two, three or five years ago, [complaints were] handled behind closed doors. … Now, in 30 seconds flat, your customer can write a review and air your dirty laundry,” says eXteresAUTO’s Turner. “It’s time for dealers to really embrace a new way of doing business and a transparency they haven’t done before.” PHOTO COURTESY GRUBBS INFINITI
12/28/10 9:12:59 AM
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Auto Finance
Doors Open for Bel In the third quarter, subprime originations increased for the first time since the credit crisis. F&I’s auto finance analyst breaks down the results.
T
By Melinda Zabritski
he auto finance market continued to thaw in the third quarter, particularly for the below-prime credit segments. Consumers deserve much of the credit, because more on-time payments have led to declines in repossessions, chargeoff and delinquency rates. For the quarter ending in September, subprime originations grew by 8 percent, marking the first increase for the high-risk credit segment since 2007. Even terms are beginning to stretch out again for the below-prime tiers, with the deep subprime category claiming the longest average term for new-vehicle financing and the largest increase in term for used financing during the quarter. Repossessions fell by 5 percent during the period, while the average charge-off amount dropped by $2,252. The most promising sign was the drop in the percentage of auto loans 30 days past due, which fell below the 3 percent mark for the first time since 2007. Additionally, the total balance of 30-day delinquent loans dropped by $4.5 billion. The following analysis will provide a more detailed picture of how far the auto finance market has come since the credit crisis took hold two years ago and a snapshot of consumer activity in the third quarter. Risk Distribution Still Geared Toward Prime
The overall risk distribution between the credit tiers has remained stable over the last several years, with more loans falling into the low-risk prime and superprime segments. However, outstanding dollar balances during the quarter were down $38 billion from the year-ago period, with banks and captive lenders experiencing the largest decreases — $15 billion and $13 billion, respectively. Credit Risk Distribution of Open Loans 3Q2010 Deep subprime (<550) 12.9%
Subprime (550-619) 8.8%
Nonprime (620-679) 15.5%
16 F&I and Showroom January 2011
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unions and finance companies decreased their outstanding balances by $6 billion and $4 billion, respectively. On a quarterly basis, the percentage of consumers who fell into the combined low-risk tiers, prime and superprime, increased by 0.2 percent, inching up from 62.6 percent of all open automotive loans to 62.8 percent in the third quarter. Compared to the year-ago quarter, the outstanding balance for both low-risk categories increased by 3.12 percent and 3.05 percent, respectively. The percentage of open automotive loans falling into the deep subprime category experienced a slight quarter-over-quarter drop, declining from 13.3 percent of all open auto loans in the second quarter to 12.9 percent in the third. The decrease was more significant on a year-over-year basis, with the percentage of open automotive loans in the highest risk tier falling by 14.27 percent. Subprime stayed flat at 8.8 percent on a quarterly basis, but its percentage inched up by .02 percent from the year-ago quarter. Nonprime grew slightly from 15.3 percent to 15.5 percent. On a year-over-year basis, the credit tier’s percentage of open automotive loans increased by 1.67 percent.
Superprime (740+) 24.6%
60-Day Delinquencies Continue to Fall
Prime (680-739) 38.2%
For the second consecutive quarter, year-over-year delinquency rates decreased as consumers continued to do a better job of repaying their loans. Sixty-day delinquencies fell 17.4 percent from the third quarter 2009 to 0.77 percent. The total dollar balance of 60-day delinquent loans ILLUSTRATION ©ISTOCKPHOTO.COM / PALTO
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elow-Prime Buyers fell by 32.1 percent, or $1.9 billion, to $4.077 billion. More importantly, the decrease in 60-day delinquent loans was realized by all lending sources, with banks and captives leading the way. On a year-over-year basis, banks experienced a 22.74 percent decrease. Credit unions realized a 16.32 percent decrease, while credit unions, captives and finance companies touted decreases of 16.31 percent, 19.99 percent and 12.20 percent, respectively. Finance companies held the highest balance in 60-day delinquent loans at $1.4 billion, which was down $388 million from the year-ago quarter. Credit unions touted a 60-day delinquent balance of $509 million, $169 million less than the third quarter 2009. Banks experienced the largest drop in the balance of 60-day delinquent loans, which fell $833 million from the year-ago quarter. Captives realized a decrease of $539 million. 60-Day Delinquency Rate
2.30% 2.02%
2.0% 1.5% 1.0%
0.87% 0.67%
0.5% 0 Bank
0.74% 0.59%
Captive 3Q 2009
0.48%0.40%
Credit union Finance/other 3Q 2010
Credit Scores Remain Elevated
Although credit scores during the third quarter registered a slight decrease for both new and used vehicles compared to the year-ago quarter, they remain elevated from what was seen before the third quarter 2008 â&#x20AC;&#x201D; the last quarter before the credit crisis took hold. Average scores on new-vehicle loans fell six points on a year-over-year basis to 769 â&#x20AC;&#x201D; still seven points higher than the 762 score seen on new-vehicle loans originated Average Credit Scores by Vehicle Type 800
775
769
760 720
694
683
680 640 600 3Q2009 New financing
3Q2010 Used financing
in the third quarter 2008. Credit scores for used financing fell one point to 683 on a year-over-year basis, which was still 13 points higher than the average score registered in the third quarter 2008. The still-elevated levels in credit scores means the auto finance market remains restrictive, with about 63 percent of loans originated during the third quarter going to consumers with prime credit. Still, the 4.1 percent drop in prime originations and the 8 percent increase in subprime originations is a clear signal that the market continues to settle into pre-credit crisis patterns. Lenders Softening Stance on Risk
Access to credit has been one of the biggest challenges for dealers attempting to secure financing for their creditchallenged customers. The situation improved slightly in the third quarter, with the share of new vehicles financed to nonprime, subprime and deep subprime customers increasing by 12.7 percent. Although new-vehicle loans made to customers with prime and superprime credit during the quarter accounted for 80.94 percent of all new-vehicle loans, the nonprime, subprime and deep subprime tiers all registered market share gains. The share of loans to nonprime customers rose from 9.79 percent to 10.86 percent, while the share of loans made to subprime customers increased from 5.66 percent to 6.61 percent. Deep subprimeâ&#x20AC;&#x2122;s share increased from 1.46 percent to 1.59 percent. On the used side, 51.98 percent of loans went to customJanuary 2011 F&I and Showroom 17
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Auto Finance Rates Dip Across the Board
Financing by Vehicle Type 3Q2010 1.59% 6.61% 10.86%
100% 80%
17.62%
13.80%
15.61%
60%
14.79% 13.65%
40%
67.14%
20%
38.33%
0
New vehicles
Used vehicles
ers with superprime or prime credit in the third quarter. The share of used-vehicle loans made to customers with below-prime credit scores rose by 2.69 percent to 48.02 percent. Loans made to nonprime and subprime customers grew by 6.2 percent and 10 percent, respectively, while deep subprime fell by 5.5 percent.
The $2,530 year-over-year jump in the average amount financed seems unaccountable until one considers the effect of Cash for Clunkers. The rebate program had a dramatic impact on how much lenders were willing to finance in the third quarter 2009. The market conditions during the yearago quarter must also be taken into account when considering the $977 increase in used financing. Average Amount Financed 3Q2010
$25,000
$25,723 $22,743
$20,000
$15,729
$15,000
Average Rate for New-Vehicle Financing 16% 14%
14.0% 13.5% 11.4% 10.5%
12% 10%
8.2%
8%
Average Amount Financed Rises
$30,000
Another positive sign for car shoppers during the third quarter was the year-over-year drop in interest rates, which fell 79 basis points for new and 34 basis points for used. The only rate increase was seen in used financingâ&#x20AC;&#x2122;s two highest risk tiers. Looking at new-vehicle financing, superprime customers benefited from the lowest interest rate of 3.94 percent, a decrease from the 4.8 percent rate offered in the year-ago quarter. Even the deep subprime category realized a yearover-year decrease in interest rates, which dropped from 14.02 percent in the year-ago quarter to 13.54 percent. On the used side, rates for deep subprime and subprime increased 156 basis points to 17.81 percent and 45 basis
$16,706
6.9%
6.2%
6%
5.2%
4%
4.8%
3.9%
2% 0
Deep subprime
Subprime
Nonprime
3Q2009
Prime
Superprime
3Q2010
points to 14.71 percent, respectively. Rates for nonprime registered at 10.18 percent, a decrease of 48 basis points. The average rate for prime and superprime stood at 7.44 percent and 5.49 percent, a decrease of 89 and 105 basis points, respectively. Market Healing Despite Restrictions
The automotive finance market showed a marked improvement in the third quarter, as a higher percentage of loans were written for credit-challenged customers. Interest
$10,000 $5,000 0 New financing 3Q 2009
Used financing 3Q 2010
Looking at third quarter data from two years ago, the average amount financed registered at around $24,000, an approximate $1,200 difference from the average allowance in the third quarter 2010. On the used side, the average amount financed in the third quarter 2008 stood at $15,983, a $723 difference from the third quarter 2010. Looking at year-over-year data, the greatest amount financed among new vehicles was for the prime risk tier ($26,579), while the nonprime risk segment realized the greatest year-over-year increase of $2,830. The average amount financed for used vehicles increased across all risk segments, with the prime tier experiencing the greatest year-over-year increase ($1,130). The superprime risk tier claimed the highest amount financed, resulting in an average amount financed of $18,044 per vehicle.
Despite the positive signs, the automotive finance industry remains restrictive compared to 2007 and 2008. However, the pendulum seems to be swinging back toward a more robust lending environment. rates were down and delinquencies continued to fall, all of which point to a much healthier lending environment. Despite the positive signs, the automotive finance industry remains restrictive compared to 2007 and 2008, when loans were much more readily available for customers in all risk tiers. However, the pendulum seems to be swinging back toward a more robust lending environment. Melinda Zabritski serves as director of automotive credit for Experian Automotive. E-mail here at melinda. zabritski@bobit.com.
18 F&I and Showroom January 2011
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FI0111wellsfargo.indd 1
Wells Fargo Dealer Services
Integrated solutions personalized for your dealership We offer integrated solutions to help dealers sell more cars, finance floorplans and real estate, and gain efficiencies in their business operation — while delivering a level of local, personalized customer service that’s unmatched in the industry. ƌɄ ) $- /Ʉ 0/*ɄŨ) ) $)"Ʉ ƌɄ *(( - $ 'Ʉ )&$)"Ʉ. -1$ .1 ƌɄ !/ -( -& /Ʉ+-* 0 /.Ʉ 1 $' ' Ʉ/#-*0"#Ʉ -- )/4Ʉ *'0/$*).Ʒ2 Please contact us for a customized solution. We’re here for you now and in the future. ''Ʉ4*0-Ʉ'* 'Ʉ- +- . )/ /$1 Ʉ*-Ʉ888-937-9997, Monday through Friday, 5 a.m. to 5 p.m. PT.
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Commercial banking products and services are offered through Wachovia Bank, a division of Wells Fargo Bank, N.A. and/or Wells Fargo Bank, N.A. Member FDIC and Equal Credit Opportunity Lender. 2Vehicle service contracts offered through Warranty Solutions® a member of the Wells Fargo family of companies. Wells Fargo Dealer Services, Inc. is a subsidiary of Wells Fargo Bank, N.A. © 2010 Wells Fargo Bank, N.A. All rights reserved. 2010680-001 10/10
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PVR VSC As we’ve done for over 45 years, Resource Automotive makes an immediate impact in every department in your dealership — fixed or variable, we do it all. As part of The Warranty Group, a 2000 employee and $5 billion asset global enterprise, we provide world-class claims administration, plus, we have Virginia Surety Company,Inc., rated A- (Excellent) by AM Best, as a wholly-owned subsidiary. In addition, we’re the leader in participation programs and facilitated payouts of $100 million — just last year. It’s critical to understand that you can’t realize your potential until improvement opportunities are identified. That’s where we come in. We help you assemble the people, processes and products to not just compete, but win. Then we coach your team to victory, every time. Now is the time to reach the next level of performance. Contact Charlie Robinson today to arrange an in-depth, no-charge business analysis. charlie.robinson@TheWG.com 312.560.9182 The game is on. What do your stats look like?
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12/23/10 5:16:22 PM 2/18/10 2:01:05 PM
Compliance
C
ompliance might create industries, but it’s also responsible for what is and what will continue to be a critical post inside the dealership: the compliance manager. Such is the case with Karina Grile, who has held that title for much of her 19-year career with the nine-store, Dayton, Ohio-based Voss Auto Network. Grile assumed her post 15 years ago, shortly after her organization hired a new CFO. He made it abundantly clear that, under his watch, deals would be turned away if they weren’t done right. It was Grile who stepped in to figure out what “right” was, and she continues in that role to this day.
have, what should I do?’ That’s when we start looking at DealerTrack,” she says. “The process itself takes maybe five minutes, but it was yet another step in all the paperwork we have to do.” The group’s RFR protocol has yet to nab any would-be ID thieves, but Grile says she’s had to turn away one or two deals because customers couldn’t provide the required verification. Because of the way the RFR played out, the compliance manager admits to taking a wait-and-see approach to the new Risk-Based Pricing Rule (RBPR), which was expected to take effect on Jan. 1. In December, she found herself racing to get her group’s procedures in place, signing up for whatever Webinar she could
Karina Grile worked overtime to get Voss Auto Network’s stores in line with the industry’s newest rule — one that experts say could be a blessing in disguise.
First Line of By Gregory Arroyo
“I guess I kind of fell into this,” says Grile, who was serving as the assistant to the finance director when she assumed her current position. “I guess if it wasn’t for the CFO and my dealer, I wouldn’t have a job.”
find for guidance. “It’s definitely been a thought this entire year, but I knew it would snowball toward the end of the year,” she says, adding that she’ll once again turn to DealerTrack for a solution.
Leading the Charge
Lining Up for Battle
Grile has since grown into her position. She leads the dealership’s new-hire training, stays in constant contact with her state dealer association for any regulatory updates and tackles any issues or questions that come up about her compliance procedures. In fact, she’s fielding questions daily from her F&I managers about the dealership’s Red Flags Rule (RFR) procedures, which she established shortly before the Federal Trade Commission (FTC) delayed its enforcement of the rule for the fifth time back in May 2009. The enforcement moratorium was expected to be lifted on Dec. 31. “I get [Red Flags Rule] calls daily with questions like, ‘This is what I
Grile says she was a little nervous when she first caught wind of the new rule through the Ohio Automobile Dealers Association (OADA), but was relieved when she found out about the dealer exception. The rule — mandated by the Fair and Accurate Credit Transaction Act of 2003 — requires creditors, including dealers, to provide a specific notice to applicants who, based on their credit report, receive credit terms less favorable than those granted to other consumers. Not factoring in penalties at the state level, noncompliance with the rule can lead to fines of up to $16,000 per violation. If not for the work of the National Automobile Dealers Association
(NADA) in securing an exception, dealers would have been forced to evaluate the rate their finance sources offer on a deal-by-deal basis. That work would include determining the impact of their markup on that rate, then executing a disclosure based on those findings. With the exemption, dealers are merely obligated to hand every customer who applies for financing a credit score disclosure notice, which, among other things, must contain a written description or graphic representation of how the applicant’s credit standing ranks against other consumers in the same scoring pool. Manas Mohapatra, who serves in the FTC’s Division of Privacy and Identity Protection, says dealers can thank the advent of risk-based pricing — a practice where lenders set or adjust the price and other terms of credit provided to a customer based on his or her credit worthiness — for the rule. “With the adverse action requirement, people are told information in
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PHOTO BY STEPHANIE GRIFFIN / VOSS AUTO NETWORK
Defense their credit report probably caused their denial of credit,” Mohapatra says, “However, what had been occurring was that people were not being denied credit, but were getting much worse material terms and weren’t being informed of that fact. This rule is supposed to fill that gap.” Although the rule is intended to help consumers make an informed credit decision, it’s also intended to help them spot errors in their credit report. That’s why the rule is very specific about when the notices must be issued, requiring that the notice be handed to consumers as soon as “reasonably practical” after the dealership pulls the credit report and before consummation of the deal. “This is a consumer education rule, so the idea is to try and get that information to the consumer at a meaningful time,” Mohapatra adds. Back in the Trenches
Grile isn’t so sure reality will match the FTC’s expectations. She says it’s
clear consumers are more aware of their credit standing these days, estimating that about 75 percent of her customers know exactly where they stand. However, she doubts the notices will result in consumers shopping for better credit terms. “Given what happened to our economy, I certainly think the average consumer needs to be educated,” she says. “But making dealerships responsible for that? I just don’t know that it’s going to serve the intended purpose.” The ones really benefiting from the rule, Grile says, are the credit reporting agencies. Because the rule encourages customers to shop for better terms, the cost for pulling a bureau (usually between $2.50 and $4) could soon be walking out the door with each deal. “Once you add in OFAC and Red Flags checks,” Grile points out, “that cost can jump up a little bit.” The rule will cause a major procedural change at Grile’s dealerships. Her salespeople don’t touch credit reports — a procedure she put in
place because she felt it was a conflict of interest for them to have access to credit reports. With the rule’s timing requirement, that may need to change.
Forming a Battle Plan
Where in the sales and F&I process the credit score disclosure notice is issued will depend on the dealership’s policy, which will also need to factor in Internet sales. Whatever a dealer comes up with, RouteOne’s Dan Doman, vice president and general counsel, said dealers need to consider how the rule could open the door to a more constructive conversation with nonprime customers. “It’s going to be a reality check for some customers,” Doman says. “And it doesn’t take a real inventive individual to say, ‘Mr. Customer, you fall at the 45 range. I can help you out. I’ve sent your application to four finance sources and here are the rates I got back. Let’s see if we can’t do better.” For that reason, Doman sees the January 2011 F&I and Showroom 23
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Compliance
Automating Compliance
new requirement as one that dealers should welcome. “I think this is one of those rare federal rules that serves the intended purpose of the legislature and would be a helpful tool to the industry,” he says. RouteOne began digesting the rule last February before engaging its lender and dealer customers in June and July. By mid-November, the company began staging educational Webinars, the last of which was held Dec. 21. The company then joined five other providers — including CoreLogic Credco, DealerTrack, Reynolds and Reynolds, and Wolters Kluwer — in releasing a solution aimed at automating the dealer exception process. RouteOne is offering its solution as a complimentary tool within its credit application management system. DealerTrack is offering its solution for free to all dealerships on its credit application network. Reynolds
THE FTC WAS PRETTY SPECIFIC ABOUT
what it expects from dealers opting for the dealer exception when complying with the Risk-Based Pricing Rule. In fact, the FTC’s 200-page rule summary includes model forms dealers can easily adapt to comply with the exception requirement — just as long as they are able to deliver the required content. The key element is the ability to show potential buyers how they stack up against other consumers in the same scoring pool, but there are 12 additional items that need to appear in these notices. That’s why software providers are offering solutions to help automate that process. Here are five companies that are doing just that: CoreLogic Credco: The company provides an exception report free of charge with each Credco credit report ordered. The report includes
model forms prescribed in the 200-page rule summary published by the Federal Reserve Board and the FTC. DealerTrack: The DealerTrack Performance Suite offers a RBP Rule compliance tool for free to all dealerships on the DealerTrack credit application network. Dealers will be able to print credit score disclosure notices prefilled with all the required information, as well as exception notices on their lender’s behalf for two-party financing. In addition, dealers subscribed to the DealerTrack Compliance Solution will be able to electronically store and view status reports on all exception notices generated by the
24 F&I and Showroom January 2011
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dealership through the solution’s dashboard and audit tools. Reynolds and Reynolds: Reynolds is offering exception notices with each credit bureau inquiry report a dealership pulls. The notice will contain all of the text and contents prescribed by the regulation.
looming large. In fact, the bureau will oversee any further rulemaking with regard to the RBP Rule. “We’ll roll out [our RBP Rule processes] regardless of whether they put the brakes on it, because it’s the right thing to do and because it’s inevitable,” Grile says. “As for what lies ahead, there’s so much unknown. I
know we were carved out of the bureau, but there’s language in there about third-party paper, and every dealer in Ohio does third-party paper. I also know they were picking on dealers located near military bases, and we have one right here in Dayton. I guess we’ll just have to wait and see what they’re going after.”
RouteOne: The company is offering a complimentary Risk-Based Pricing Notice tool within its credit application management system. The company also offers a two-party financing option whenever a dealer is issuing the exception notice on the lender’s behalf. Wolters Kluwer Financial Services: Wolters Kluwer is offering the required credit score disclosure notice for dealers utilizing its AppOne credit platform.
“I think this is one of those rare federal rules that serves the intended purpose of the legislature and would be a helpful tool to the industry.” — Dan Doman, RouteOne and Credco are offering notices with each credit bureau inquiry report, while Wolters Kluwer is making its tool available to dealers using its AppOne credit platform. Each solution allows dealers to print exception notices prefilled with all of the mandated information. In the case of two-party financing, most solutions will allow dealers to provide exception notices on the lender’s behalf. Although she was racing against the clock, Grile has no doubt her dealership will be in compliance with the rule some said would bring the F&I process to its knees. But the work of a compliance manager is never done, especially as the industry heads into a new period of rulemaking with the Consumer Finance Protection Bureau January 2011 F&I and Showroom 25
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Q&A
I
t’s the largest single-source provider of underwriting and administration of service contracts and extended warranties, touting a global footprint that extends into a variety of consumer goods, from autos and electronics to major home appliances and travel. But as complex as The Warranty Group has become, it remains true to its principles, says Michael Frosch, the company’s president and COO of North American operations. Frosch opened up to the magazine and offered his vision of the road ahead for the automotive industry.
this year, picking up clients such as Safe-Guard and Interstate. What was behind that division’s success this year?
F&I: The Warranty Group and
F&I: Talk about the company's
its Resource Automotive entity have been through a lot of changes. Can you get our readers caught up with where your company stands today?
Frosch: There have been a lot of com-
panies that have come in and out of our business. A lot of them thought they could do it, but, in the end, they couldn’t. Unfortunately, the only ones who got hurt are the dealers and their customers. So, what you saw in 2008 and 2009 was really a flight to quality, which obviously benefited us since the clients we picked up were looking for a partner with the focus and experience in this very specific business. ResourceVIP program, which you rolled out in 2004. If I’m not mistaken, it represents your first foray into inventory management.
Getting
The magazine catches up with The Warranty Group’s Michael Frosch to discuss F&I, automotive retailing and the road ahead. By Gregory Arroyo Frosch: The big picture is The Warranty Group, whether it’s in China, Latin America or North America, or whether we’re talking protection products for electronics, appliances, travel coverage or automotive. Resource Automotive simply represents the auto side of our business.
Frosch: Well, our mission is to maxi-
mize income for our clients on a per-vehicle basis, and ResourceVIP supports that concept. It’s a custom program that helps dealers manage their returns on their inventory and allows them to see what’s moving, when it’s moving and what the requirements were for their inventory to move.
F&I: What was the strategy
during the downturn?
Frosch: The strategy was to work
with the best of the best. It was about helping dealers through automation, enhancing our solutions and providing support to maximize the benefit. F&I: Your insurance carrier,
Virginia Surety, definitely won some battles in the trenches 26 F&I and Showroom January 2011
FI0111qa_frosch.indd 26
F&I: Where do you stand on
all this talk about dealers combining sales and F&I roles?
Frosch: We continue to see great value in the F&I model. It has worked and it has been successful. However, we recognize that there is no one-size-fits-all [solution], so we support our clients as they wish to be supported.
F&I: I’ve noticed a real pickup
in interest for reinsurance. What are you seeing?
Frosch: Reinsurance remains a successful model in this industry, and it’s an extremely valuable tool if you partner with a company that understands it, has experience with it, knows how to handle claims, takes care of customers, knows how to price and configure the product and will act as a partner to you. And that’s what we bring to the market. See, we’re not a monoline, oneapproach kind of company. We have direct programs, reinsurance programs, dealer-obligor programs. We are the underwriter, the actuary and the administrative company, and we own our own compliance groups and entities. So, it really is about what our PHOTO ©ISTOCKPHOTO.COM / LEVENTKONUK
12/23/10 5:02:36 PM
ronmental protection product, as is GAP. We just believe it’s the technology we employ that really adds value for the consumer. F&I: Do you consider mobile
devices a viable touchpoint?
Frosch: We’re looking at every po-
tential touchpoint with a consumer as you would expect, and each customer really has a different way that they wish to interact. So, we’ll continue, as others in the industry will, to look at new options and opportunities. F&I: Fuel efficiency remains
a big topic in the industry. How has that impacted your offerings?
Frosch: When you see the Volt or
the Leaf come out, it’s clear products must continue to evolve. It’s the same thing when you see manufacturers offering longer warranties or longer powertrain coverage. Now,
expanded warranty was. Expanding powertrain coverage is great, but that’s not expanding the coverage on the vehicle. There are still a lot of items out there where the customer needs protection. Still, when these changes come down the pike, it’s about how well you understand the business and about how quickly you can market and develop new products to complement the changes. F&I: Given the intense fallout
from the US Fidelis debacle, where do you stand on the direct-to-consumer sales model?
Frosch: We have multiple points of distribution. At the end of the day, it really is about how the customer wants to be interacted with and making those options available to dealers. As for US Fidelis, we don’t view that as a distraction to that model.
Resourceful clients want to accomplish. I always like to phrase it as, ‘What you need, when you need it.’ F&I: Talk about your
prepaid maintenance product and the things you’ve done to increase customer loyalty.
Frosch: It definitely is a great product for pumping the service drive. However, we view our entire product portfolio as valuable components of a customer-retention strategy. What makes us different is the customer touchpoints we’ve built into these products — e-mail reminders, things of that nature. So, prepaid maintenance is a viable product, as is our QCertified product, as is our LUXCARE envi-
the advantage we have is that when new technology is introduced, we’re going to see it pretty quickly because of our global exposure. Remember, electric cars are not a new concept and neither are hybrids. What we are able to do is leverage the information we collect, pull it together and make decisions on how to create, customize and adapt. F&I: Speaking of longer
warranties, were the fears expressed a couple of years ago regarding the factories extending out warranties ever realized?
Frosch: That defi nitely didn’t have
an impact, because, again, we found mechanisms to expand our coverage to complement whatever the
F&I: With the economy growing
again and added stability on the lending side, will we realize the industry’s “new norm” in 2011?
Frosch: There are micro- and macro-
economic issues that are driving everything, so right now the new norm is holding your vehicle longer. The new norm also is change, which is why it’s critical that you partner with someone who is flexible and can adapt. As for my outlook, there’s no denying that the last couple of years have been interesting, and that the next two will be the same. The good news is, we’re looking at a big block of consumers who will be coming into their prime spending period. For right now, I just think we’re in a transition period. January 2011 F&I and Showroom 27
FI0111qa_frosch.indd 27
12/23/10 5:02:38 PM
Mailers were the first line item scratched from many dealers’ advertising budgets during the downturn. Marketing ace says it’s time to add them back. By Tariq Kamal
Direct
Mail Comeback
Mounts a
A
s the founder and president of DealerLink, a Charlotte, N.C.-based marketing services provider, Tim Parker has helped his auto dealer clients launch all manner of direct-mail campaigns. The economic downturn and onset of the Internet age, however, put mailers on the back burner for many dealers, but Parker believes the medium is poised for a comeback — so sure that his company is offering a money-back guarantee. The magazine caught up with Parker to find out why he thinks dealers will turn to direct mail in a big way in 2011.
F&I: Just how badly did
direct mail suffer as a result of the credit crisis?
Parker: Certainly, a number of dealers cut back. But direct mail suffered for other reasons as well. First, for years, dealers had been doing direct mail almost blindly, without any consideration for whether the customer could qualify. It’s known in the industry as saturation mail. Why, in today’s economy, would a dealer want to advertise to someone who simply can’t qualify to buy? Second, in talking to dealers over the last two-plus years, it was evident they felt opportunities were missed when they were fielding the inquiries from customers on their direct mail. See, during the downturn, many dealers disbanded their BDCs, so their salespeople had to answer phones. 28 F&I and Showroom January 2011
FI0111sf_parker.indd 28
F&I: In the third quarter 2009,
subprime auto loan originations grew for the first time since the onset of the credit crisis. Did you see more orders from dealers looking for special finance customers at that time?
Parker: Across the board, we started
to see an increase in activity. Lenders still are asking more questions. Scoring is in place for prime, but they’re double-checking everybody else. F&I: Do you think dealers will
react to that news by sending more-targeted mailers and restaffing their BDCs?
Parker: Yes and no. I do expect dealers to choose their campaigns more carefully, and they’re going to want to know exactly where they’re spending their money. As for the BDCs, we have eliminated that concern because we insist that our call center, which is based in the United States, field all the calls and set appointments based on a schedule the dealer provides. We also follow up with any no-shows. F&I: What types of campaign are
mean they can qualify for an auto loan. There are any number of factors that may disqualify them, such as recent derogatory credit items after the filing, or multiple bankruptcies. Or they may simply not meet the banks’ minimum credit criteria. F&I: If you’re going by credit
score, what’s your target range?
Parker: We let each dealer determine
the credit score range for his or her campaign, but our history shows the greatest success with scores between 525 and 675. There’s not much response from consumers above 675. However, if you have in-house financing — or perhaps Credit Acceptance — and can do anything below 525, you can have a lot of fun with this program. And, to my knowledge, DealerLink’s credit score mail is the only one in the industry that is willing to guarantee the dealer’s investment. F&I: What do you say to dealers
who believe direct mail’s role is better filled by Internet and social media marketing?
you recommending for 2011?
Parker: Social media marketing is
Parker: We don’t offer saturation mail,
certainly a medium in which every dealer should have a presence, but the consumers you reach through social media marketing already know who you are, and they may not qualify for the financing you’re advertising. The consumers you get from our direct mail programs are new to you, and they absolutely will have the credit required for you to sell them a car.
only bankruptcy and credit scorebased direct mail. Frankly, we see anywhere from three to six times better results from the credit score-based mail than the bankruptcy mail. F&I: Why is that? Parker: Just because a consumer has a discharged bankruptcy doesn’t
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Sales Driver
6 Sales-Driving Ideas Forget those New Year’s resolutions. Here are six things you can do to improve your chances in the showroom in 2011. By Cory Mosley
I
f you’ve been reading my columns over the last few months, you’ve heard me talk about taking responsibility, setting goals and the benefits of continuing to be a good student. I want to drive that message home with what I believe are the six keys to making 2011 your best year ever.
1
Reinvent Yourself: Whether you re-
alize it or not, you’re a brand, and that brand is reflected in how you sell or manage. In fact, at this very moment, you are known for something. It could be that you’re great with customers. Maybe you’re a strong closer. Now, whatever you are today doesn’t have to be what you are tomorrow. Way too often, people will hide behind the idea that they are simply just the way they are, which is really an excuse to ignore their opportunity to be better. Why not try to become a specialist in trucks, SUV or coupes and learn all there is to know about the category, including competing brands? Not only will this newfound confidence contribute to higher gross profit, it will eliminate the fear of losing deals to products of lesser quality.
2
Create Separation: When all things are equal, you have a 50/50 chance to win or lose with each prospect. While those odds may be OK on the roulette table, I doubt they will work in the showroom. That’s why you need to focus on enhancing the customer experience to the maximum level. For instance, instead of telling people to “come on down,” invite customers to schedule a “price and vehicle consultation, where we use all of our resources at the dealership to help you
make the best car-buying decision.” Doesn’t that sound more intriguing? To improve in 2011, you must focus on enhancing the experience and your approach on the road to the sale. During a recent celebration for my grandparents’ 60th wedding anniversary, my grandfather gave a short speech and offered a few words of wisdom about marriage that I think is extremely relevant in the sales environment. He said that the way you stay married for 60 years to is to always make your wife think she’s in control. The same goes for your customers, make them feel like they’re in control. All it takes is a little finesse.
3
Focus on Service: It saddens me to see salespeople who spend their day staring at the door, waiting for the next “up” to come in. I don’t care what you sell, every brand and dealership retains a certain percentage of its customers. It is your responsibility as a salesperson to maintain a relationship with your customers after the sale. And we all know the rewards associated with customer retention: referral business, sales to others in the household and less negotiating the second and third time around. In most cases, the result is a higher gross profit.
4
Strive for Excellence: If you don’t care, who will? Strive to be the best and don’t settle for anything less. And if your gauge for excellence is what others are doing, stop. There’s a story I like to tell about a salesman I once knew named Al Bowers. He could literally take half of the month off and roll 20 cars in the
last week. Al, who had two phones at his desk, didn’t mess around. Some salespeople were jealous of his talents, others just wanted to beat him on the monthly leaderboard, but never thought it was possible — well, until someone finally did.
5
Evaluate Outcomes: Start taking
a look at the deals you don’t make. Sales guru Zig Ziglar states that every sale has five basic obstacles to overcome: no money, no hurry, no time, no desire and no trust. Instead of simply deactivating that lost deal from your CRM system and moving on to the next customer, take a moment and reflect on which obstacle you might have failed to overcome.
6
Work the Payplan: Do you really understand how your payplan works? More importantly, do you know how to maximize it? If not, you could be leaving big money on the table. Are there special “spiff” cars that pay double the commission? Do you get a piece of the back-end action, but haven’t taken the time to work closer with your F&I manager? Are there bonuses on aging inventory? You need to know all of these things before you work your next customer. Finally, let’s have some fun! Experts who track the business say it should be a good year for the business, so let’s rock ’n’ roll and make it the best year ever! Cory Mosley is principal of Mosley Training LLC, a nationally recognized training provider focused on new-school techniques, products and services. E-mail him at cory.mosley@bobit.com.
30 F&I and Showroom January 2011
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Mad Marv
Squishing the Flea Mentality Will creating a list of New Year’s resolutions really help you better yourself? The magazine’s front-lines columnist doesn’t think so. By Marv Eleazer
I
n just about every trade publication this month, you’ll find something written about setting New Year’s resolutions and getting back to the basics — each touting a “fresh start” message. These articles certainly catch our attention, and why not? They come at a time when we’re reflecting on our shortcomings from the past year, so we pause and read in hopes of changing for the better. Good for us, right? Well, I’d like to take a different tack with my New Year’s column.
beyond the height of the jar’s lid — even after it has been removed. It only takes a few knocks on the head before the flea begins to realize that jumping into the lid only leads to pain. The experience engrains in the flea’s mind that he can only go so far. Now, if you really want to be amazed, try adding fleas to the jar that weren’t part of the original experiment. The new additions will jump right out, but, incredibly, the flea
limitations that that’s the way it was, which meant I kept falling short of my abilities. During the course of our lives, we become accustomed to staying within certain parameters. We do that because moving beyond those checkpoints would require us to risk a little pain. So, we stay in our self-imposed ruts to avoid leaving our comfort zones. It’s easy to stay where we are because there is no suffering when we’re
It’s easy to stay where you are because there is no suffering when we’re in our comfort zones. But ask yourself, are you satisfied with where you are? Are you okay with not rising to the challenge in this new economy? It just seems like the same promises appear on my list year after year: treat people better, stop smoking (I love my cigars) and lose weight. The problem is, we tend to fall back into the same old habits after a short few weeks or months. Hey, we’re creatures of habit, aren’t we? See, unless we have some sort of epiphany, it’s often difficult to convince ourselves to endure a behavioral change. The truth — whether we accept it or not — is that we are limited by our own desire to improve. Consider the common flea. This tiny, fragile critter thinks nothing of biting creatures thousands of times his size. You might think he was determined not to allow anything to get in his way. A simple experiment, however, proves otherwise. See, it is common knowledge that a flea, after having been sealed in a jar and after having made numerous attempts to jump out, will not leap PHOTO ©ISTOCKPHOTO.COM / NNEHRING
FI0111madmarv.indd 31
from the original experiment won’t follow his kin, even as he watches them leap to freedom. If his friends are able to escape, why can’t he do the same? The answer is simple: He doesn’t believe he can, so he remains a prisoner of his own self-imposed limitations. Doesn’t this sound familiar? Some of you began 2010 with a renewed vigor to improve your profit per retail unit, so you made a resolution to change. However, somewhere between then and now, your vision started getting cloudy and your numbers fell back into the same rut — or worse. What happened? Did the lumps on your head cause too much pain to try again? Listen, I’ve been there and fully understand what you’re going through. Like the flea, I’ve believed something couldn’t be done while I watched others leaping right past me. I was convinced by my self-imposed
in our comfort zones. But ask yourself, are you satisfied with where you are? Are you okay with not rising to the challenge in this new economy? If you’ve made it this far in the column, my bet is your answer to those questions is a resounding “No.” If that’s the case, then, right here, right now, analyze what you want to accomplish this year and beyond and determine what behavioral changes you need to make to get there. Don’t make another silly New Year’s resolution. Be brave and make a promise to yourself to truly improve. Don’t do it because I’m challenging you — do it because you deserve it, your family deserves it, your dealer deserves it, and, Lord knows, it’s about time you did! So, stop bumping your head and leap out of your jar. Marv Eleazer is the finance manager at Langdale Ford in Valdosta, Ga. E-mail him at marv.eleazer@bobit.com.
January 2011 F&I and Showroom 31
12/23/10 5:02:08 PM
Legal
The Hunt for Noncompliant Dealers The FTC has been poking around at some dealerships in recent months. What is the agency looking for? The magazine’s legal expert weighs in. By Tom Hudson
M
y dealer client called in a blind panic. He had arrived at his dealership that morning to find a letter lurking in the mail from the Federal Trade Commission, or, more specifically, from the FTC’s Division of Financial Practices, Bureau of Consumer Protection. The letter announced that the FTC was conducting a “nonpublic investigation” to determine whether the practices of my client’s dealership complied with the FTC’s Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses. The letter requested that the dealer voluntarily provide, “in lieu of compulsory process” (hint, hint), a boatload of information, and requested copies of a number of documents, including copies of all consumer credit contracts executed by the dealership on or after Oct. 1, 2009. A little background is in order at this point. The rule referenced in the FTC’s letter is commonly called “The Holder Rule.” It has been on the FTC’s books since the Pilgrims landed at Plymouth Rock. The Holder Rule was the FTC’s response to a particular abuse it had identified in the credit sale of consumer goods. See, way back when, a merchant who sold a shoddy refrigerator on credit could assign the consumer’s installment contract to a finance company. When the consumer quit making payments to the finance company because the refrigerator was a piece of junk, the finance company could claim that it was a “holder in due course” of the customer’s obligation and, by virtue of that status, was immune from the consumer’s claims.
The FTC’s Holder Rule brought those practices to a grinding halt. The rule required credit sellers to include a provision in their contracts stating that the holder of the contract was subject to the claims and defenses of the consumer. Problem solved. I was a new lawyer when the Holder Rule took effect, and I still recall the anguished screams of banks and finance companies who bought retail installment contracts from car dealers and who thought they would become targets for all of the car buyers who had claims or defenses against the dealers who sold them their cars. It never happened. Dealers and finance companies stuck the required language in their credit contracts, and banks and finance companies amended their dealer agreements so that dealers would be on the hook for any consumer claims and defenses asserted under the Holder Rule. Sure, there were a few problems here and there, but the world didn’t end. So, why did the FTC suddenly get its shorts in a twist about dealer compliance with the Holder Rule? The short answer is, I have no idea. About the only thing that I can come up with is that the members of the FTC’s newly formed Auto Dealer Task Force were sitting around a table trying to figure out a good first move to show how serious they are about curbing abuses. So, they decided to gather some facts about one of their early consumer protection initiatives to see how it was working. To my knowledge, the FTC has never taken any steps, formal or otherwise, to assess the Holder Rule’s effectiveness. If that is what is going on, I predict
that the FTC will be mightily pleased with what it finds. I haven’t seen a retail installment contract printed since the Holder Rule went into effect that didn’t contain the language mandated by the rule. So, let’s get back to my dealer client. After he recovered from his panic, I told him that unless he had encountered a specific problem lately, it was not likely that the FTC had a particular interest in his dealership, and that it was more likely than not that such a letter was sent to a random sampling of dealers in an attempt by the FTC to test industry compliance with the Holder Rule. This particular story has a happy ending. The dealer forwarded the letter and we worked with the FTC’s staff to scale down the scope of what our client would produce. Our client does a little legwork for the commission and can rest easy that he isn’t in the FTC’s gunsights. The next story might take a nastier turn, though. Industry compliance with many of the FTC’s rules and regulations isn’t what it should be, and the next letter might be directed at practices where dealers are much more vulnerable. If you haven’t had lunch lately with your friendly dealership lawyer, now might be a good time. Thomas B. Hudson Esq. is a partner in the law firm of Hudson Cook LLP and author of several books. For more on his books, visit www.CounselorLibrary. com. ©CounselorLibrary.com 2010, all rights reserved. Based on an article from Spot Delivery. Single print publication rights only, to F&I and Showroom magazine. HC# 4819-7967-3352 (12/10).
32 F&I and Showroom January 2011
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CA CAR-Research XRM, a CRM solution provider, C has added the Service h Drive Control ManagD er e module to its CRM. The T new functionality helps identify h l service i technicians t needed maintenance and repairs in their customers’ vehicles. The module, which is built into the CAR-Research CRM solution, also provides service departments with an online scheduling tool and a route sheet that automatically displays key information related to repair orders. For more information, visit www.CARResearchXRM.com
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Kelley Blue Book has launched a free, interactive app for Android mobile devices, which provides car-buying and -selling information. Users gain access to new- and use-car values, including MSRP, invoice, fair purchase price and more. Dealers also can use this information in vehicle transaction negotiations. The app also offers directions to dealers, vehicle photos and video reviews. To download the app, visit http://market.android. com/details?id=com.kbb.mobile on any Android device.
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#FCN? A?HNM 1IOABN @IL ,?Q $ ' .LI>O=N *;OH=B We are currently interviewing top-performing agents who want to increase their business and revenue by 20% in 2011. Territories are being established throughout the Unites States Imagine a product that will not compete with any current offerings, yet still has a 20-30% penetration level. An agent with 20 dealers will see an additional $18,000 per month in additional 10/22/09 residual income immediately. Repair Assurance is a brand new product and really, a new product category for F&I departments that you can bring to your current dealers. Repair Assurance also provides a powerful door opener for prospective dealer customers. It doesn’t replace your current VSC but provides an F&I product you can sell to consumers who can’t or won’t buy a VSC. Repair Assurance also drives used car buyers back into your dealer’s Service Departments, resulting in a 60% increase in service revenue. Imagine the value you bring to your dealers current and potential with this powerful of a service. Find out more. Call Repair Assurance at 1-651-210-3908 or hburns@vmgmn.com
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Leading the way to a higher bottom line. Your Complete Source. Keep your dealership on the path to greater profits. With the help of IAS and our experienced sales team, take advantage of our products and the knowledge to complete the profit puzzle.
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© 2011 Innovative Aftermarket Systems L.P. All Rights Reserved.
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Industry Trends
Sales to Strengthen in December and Beyond, Reports CNW Several factors will contribute to successful year-end sales, including an increase in consumer demand and higher loan approvals. fourth quarter 2010. Floor traffic jumped in the early part of December by more than 33 percent for new cars and more than 54 percent for used cars, compared to 20 percent and 6 percent, respectively, in November. This increase in demand shortened the average delay of new-vehicle acquisitions in November, which could bode well for the first quarter 2011. Another positive indicator of the industry’s improving health is the shrinking gap between average transactions prices and MSRPs, wrote Spinella. The gap hit 85 percent in November and may close, based on preliminary data, to nearly 86 percent in December. Meanwhile, loan approvals continued to increase for subprime buyers, reaching 8.51 percent in November. Additionally, 66.29 percent of nearprime loans were approved, while 84.17 percent of prime loans received approvals. November also was the sixth consecutive month in which the share of finance units increased. Spinella attributed that streak to looser credit, a general acceptance of lower credit scores and the willingness of banks to
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Share Used Sales Under FICO 670 40% 35% 30% 25% 20% 15% 10% 5% 0
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Used Avg FICO Score
lend on private-party sales. Spinella added that recent increases in usedvehicle financing should continue in December and into the first quarter of next year, putting the industry back on track for a 40 million-unit year. The average FICO score for usedvehicle sales in December is expected to be 622, the lowest figure of the year. Additionally, the share of usedvehicle sales under the 670 FICO score was expected to reach 37.23 percent in December, the largest percentage of the year. Leasing also continues to pick up steam. In November, Ford equaled the industry average with 25.4 percent of vehicles leased, while 29.28 percent of Toyotas and 28.46 percent of Hondas were leased. “The drive for leasing among some automakers — especially second-tier Asian and weaker Detroit nameplates — is the extremely positive results leasing has on brand loyalty,” Spinella wrote. This year, 39 percent of customers who took out leases back in 2008 ended up selecting the same brand at the end of their lease term. The share is slightly higher for lessees who had short leases written in 2009.
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trong November sales and an increase in consumer demand had the industry poised for a strong end-of-year sales month and an even better first quarter, CNW Research’s Art Spinella predicted in his December “State of the Industry” report. Retail sales as a share of total sales increased 64.2 percent in November, according to the Bandon, Ore.-based market research firm. Total newand used-vehicle sales increased 4.8 percent in November, following a spike of 26 percent in October. Based on Spinella’s preliminary data, total vehicle sales could be up as much as 8 percent in December. “In fact, this month may be the most positive outlook this early in a month since pre-2007,” he wrote about December. “If it is, the first quarter of next year should be extremely bright.” The performance of December sales will depend on the influx of consumers who are entering the newvehicle market. Looking at the months of October and November, as well as the first full week of December, CNW believes the measure of newto-market share could climb to more than 46 percent by the end of the
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