Indirectly Speaking

Do you ever watch a movie or a TV show and think to yourself, "I could do that." It's a favorite pastime of mine.

I'm a big fan of "Breaking Bad," and I often find myself day dreaming, wondering if I could be Walter White. Could I become a drug kingpin? I'll think about it for a couple of minutes, but I always come crashing back down to earth when I consider the likelihood of getting caught or ending up dead. In my head, I have no problem with the ethics or morality questions brought on by such a career choice. But that's definitely not the case in real life.

I was forwarded an article the other day about the advertising industry. The article went on to describe how publishers are using gifts and parties to woo ad agencies, in the hopes of having the agencies use the publishers for advertising campaigns.

If you look at this practice from one perspective, you find a client doing what it can to try and win business, so that it can make money and stay in business. If you look at it from another perspective, it's bribery. In a lot of places, trying to win business by offering anything of monetary value is frowned upon.

This article led me to wondering about the indirect auto lending business. The principles are the same. Dealers are like ad agencies, acting as intermediaries between customers and lenders (or publishers, in this scenario). I want to make it clear from the outset that I'm not implying that lenders are bribing dealers to steer customers in a certain direction. But if you look around a dealer's office, you'll see coffee mugs, pens, and mouse pads all adorned with logos of finance companies.

What I wondered was how this tightrope is walked -- by lenders and dealers -- on a day-to-day basis. Lenders need to differentiate themselves from their competitors. Dealers want customers to keep coming back to buy new cars. Lenders want to give customers the best deal to keep them satisfied and also keep them coming back when they buy new cars. It's a dynamic that is ripe for abuse. All these questions led to one bigger question: Should indirect lending be discontinued?

In defense of the indirect model are the billions of dollars in underwritten loans -- loans that have been paid on time. And, as was noted last week, delinquency rates are at all-time lows. As well, a borrower who goes directly to a lender to obtain a car loan can just as easily get a loan that isn't a perfect fit. People make bad choices every day.

Those arguments can all be filed under, "If it ain't broke, don't fix it."

But just because loan payments are being made on time doesn't necessarily mean that a customer was given the most appropriate loan. And anyone who spends a minute or two, on the drive home from a dealership, thinking about how the indirect lending model works, could have a seed of doubt planted in his mind that the dealer was looking out for himself rather than the customer. And it only takes one seed of doubt to grow into a tree of lawsuits for dealers and lenders.

Is it just better for everyone to let the customers make the decision -- right or wrong -- about what kind of car loan to get?

Tags: dealer, direct lending, indirect lending, lender

0 members like this

Comment by Gino on August 27, 2012 at 4:30pm: This is a very good question, but you need to ask what about auctions that give away trips, flat screen TV's or transport companies that pay green fees for their clients or repo agents that send clients on trips and vacations. Just wondering...

Comment by Frank Mercer on August 27, 2012 at 5:53pm: Interesting discussion. I have always been a lender and have never worked in a dealership. What I have learned about indirect lending is that we all know the F&I desk submits all applications to multiple lenders and with DealerTrack, RouteOne (and others) directing the applications to a dealers chosen lenders, the application process is now a commodity that gets bid upon. Since all F&I people work their pay plan, the lender where the F&I makes the most profit for themselves (not necessarily the dealership) gets the deal. Even if a consumer walks into a dealership with a pre-approved loan, the application most often still gets directed to the F&I's favorite lenders and then the consumer is convenienced to take that loan and not the preapproved loan. Just my thoughts.

Comment by Raymond on August 28, 2012 at 8:26am: As an indirect lender, I have considered this question - given all things equal (loan amount, rate, term, dealer incentive) which loan will the F&I people offer the customer? Is it the lender that gives the best "bribe" or which lender suits the customer? I guess it is the same question just asked differently? Have a good day.

Comment by James Matthew Shaw on September 20, 2012 at 1:01pm: This is an interesting topic. I can say with certainty from a dealer's perspective that it's all about dollars and cents. I'm in the lending business now, but spent 9 years working with customers and lenders alike as an F&I Manager. Simply put, Mr. Mercer has a good point. F&I personnel work their respective pay plans to the fullest, and at any cost. "Relationship" lending is important but ultimately the contract will go to the lender who offers maximum profit for the dealer. I wouldn't categorize that as bribery because unless the dealer's portfolio is performing well, the callbacks will not be competitive. The majority of dealers truly believe, in fact live by it, that sub-prime customers will take what they are given. Therefore eliminating any drive by the customer to negotiate the terms of the loan because the dealer has convinced them they are 'lucky' to have been approved at all. The fact the indirect lending business is a multi-billion dollar industry, I can't foresee any changes affording customers the right to negotiate directly with the lender.

Comment