HAUUPAGE, N.Y.—Credit unions can expect auto lending to remain strong in 2016 due to several factors—one being that the CFPB is cracking down on lenders allowing dealers to significantly mark up the rate.

GrooveCar SVP Frank Rinaudo said the CFPB’s actions are already limiting the practice of dealer mark-up and are leveling the indirect lending playing field, giving CUs a better shot at getting loans at the car store. Many CUs already simply pay dealers a flat fee on the amount financed, typically around 1%.

Dealer mark-up, also referred to as buy-rate financing, is when the lender provides the dealer with its rates, then allows the F&I department to mark up the rate at their discretion, often as much as 2.5%. 

Rinaudo noted that on a $30,000 60-month loan, for example, a dealer mark-up of 2.5% means an additional $34 dollars per payment and $2,000 over the life of the loan to the member. The dealer typically receives 80% and the lender 20%. That is tough for credit unions to compete against with their flat fees, said Rinaudo.

“And this is something that consumers know nothing about when they come to the dealership,” said Rinaudo. “They don’t know they are approved for a loan at 2% and then the dealer tells them 4.5%.”

CFPB Now Watching Lenders

As previous reports have indicated, the CFPB has been coming down on dealers for the practice and has turned its attention now to include big auto lenders. The CFPB cites the practice as being unfair, deceptive and sometimes discriminatory.

The actions of American Honda Finance, following the major auto lender settling with the CFPB earlier this year for allowing dealers to mark up rates, indicate the dealer incentive playing field is already leveling, explained Rinaudo.

“American Honda Finance had to pay $24 million in restitution to affected borrowers,” he said. “More important, prior to the settlement Honda Finance allowed dealers to mark up rates 2.5%. Since then Honda has limited the mark-up to 1.25% up to 60 months and 1.5% above 60. This is a tremendous change in the auto industry—now it’s wait-and-see if the other large lenders follow suit.” Frank Rinaudo, GrooveCar

The CFPB has also settled with Toyota Motor Credit Corp., Nissan Motor Acceptance Corp. and several large banks, including Ally Financial, said Rinaudo, who added that many banks still allow dealers to mark up rates up to 2.5%.

New car sales next year are expected to exceed the 16-million units projected for 2015, said Rinaudo, who also said to expect the trend of longer terms picking up steam as interest rates rise in 2016.

Rinaudo said average terms for new car loans is 67 months, and 35% of all new car loans are now 72-84 months. Used cars terms average 62 months.

“Rising rates will just continue the trend of longer terms to keep the payment affordable,” said Rinaudo, who added that credit unions’ sweet spot over other lenders has been longer terms, and that they do a good job of managing risk here. “We have one credit union in our indirect program that will go out to 96 months on a new vehicle.”

New Tech Driving Higher Prices

The rising price of cars, driven a great deal by all the new technology they now come with, combined with rising rates should also lengthen leasing terms in 2016, said Rinaudo.

“In 2016, the average lease term will likely increase to 39-40 months. The average lease for our CU Xpress Lease product is 37 months, but we are seeing more 40-month leases. Five years ago the average lease term was 33-34 months,” said Rinaudo, noting that CU Xpress Lease dollars are reaching record levels, with the program set to expend further.

GrooveCar has also seen a great deal of credit union and member interest in its GrooveCar Direct car buying website. The site CUs simply plug into their own homepages will relaunch in early 2016 with even more sophisticated technology Rinaudo said.

“Having your own car buying site is very important to the credit union,” said Rinaudo. “As we know, you have to keep the borrower from drifting away by using sites like Cars.com. You have to keep members in the fold throughout the entire car-shopping experience, or you risk losing them.”

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