June 15, 2021

Dealership reserve less important now in F&I revenue stream

Invigorated interest in examining automotive finance transactions is putting pressure on one of a dealership’s revenue streams — dealership reserve, the retail margin earned for arranging a loan.

But Dan Mason, executive vice president at Principal Warranty Corp., and other retail experts say dealership reserve is less important for overall F&I revenue than in previous years.

Mason said stores that still focus on increasing profit from dealership reserve rarely have the customer’s best interest at heart. Mason worked as an F&I manager for 22 years and was a corporate finance director and chief compliance officer. His company manages compliance and training for more than 120 stores.

Relying on dealership reserve could tempt stores to put customers in less desirable auto loans than they are qualified for, he said. Plus, if a customer finds a cheaper loan at a separate lender, the dealership loses out, Mason said.

“The dealership loses the money if they refinance, and it doesn’t have a benefit to the customer,” he said.

Mason advises dealership clients to keep dealership participation profits below 30 percent of overall F&I profit per vehicle retailed, placing more onus on the value of the protection products for consumers.

“If we’re truly putting our customers’ best interest first, the value is in the products,” he said.

Dealership markup on auto loans is acceptable as long as it’s consistent and minimal, advises Jim Ganther, CEO of Mosaic Compliance Services. Stores need to balance risk and reward when crafting markup policies on reserve and F&I products, and document their entire process in accordance with federal laws, he said. “Pigs get fed, hogs get slaughtered,” Ganther said. “Don’t charge $5,000 markup on a service contract that cost $1,500.”

Not every dealership is looking to lower reserve income. Justin Gasman, finance director at McCaddon Cadillac-Buick-GMC, in Boulder, Colo., said nearly half of his income as an F&I manager comes from arranging indirect financing.

In April, 41 of the 61 vehicles the dealership sold were financed. The store made $58,579 in income just from reserve. “My goal isn’t to see how much reserve I can make, but reserve is part of the package,” he said.

Part of his success comes from supply shortages plaguing the industry. Inventory turns quickly at the store, and the dealership is selling most of its vehicles at sticker price.

Dealerships can abuse customers through reserve, Gasman said. But as long as they follow the rules, there’s no harm in asking for a higher rate. Ignorance is most often the culprit, he said, citing a situation in which a lawyer who works with dealerships on compliance asked why a store would consider deviating from the standard 2 basis points of participation on a finance transaction.

“If you’re going to participate in it, have a policy and follow the policy,” Gasman said. “Have it written down and if you deviate, put a piece of paper in the deal that shows what the deal was, what your standard markup is, what you did and why you did it.”