Eliminating Dealer Reserve: What Would the Sales & Financing Process Look Like?

New custom analysis from IHS Automotive shows signs that moving financing process up front is already reaping significant benefits and ROI for dealers.

Proposed regulations by the CFPB have caused panic in the industry as dealers focus primarily on the potential negative impact to their bottom lines. The biggest concern being that the regulations will force a move to a flat-fee payment structure, essentially eliminating dealer participation in the finance contract process. This sounds like a profound loss of revenue when you can no longer collect the gap between the lender’s approved interest rate and the APR the finance manager wrote the purchase contract at.

But a new custom analysis from IHS Automotive, which incorporated Polk into its business last year, indicates that some of the changes that will take place post-CFPB – namely, moving the financing up front – could actually improve a dealership’s profitability. How does a $20 cost-per-sale and an up to 50% closing ratio sound to you? But more on that later. Let’s start by standing back and looking at the current sales process and consider the changes that need to take place if CFPB regulations come into play — you might be surprised at the positive picture it paints. And it’s more than likely you’ll want to get your dealership starting to think about how you can implement some of these changes sooner rather than later.

So we all know that the car buying process is as painful as ever: although some practices have helped consumers over the last decade (most notably more transparency on the Internet), the fact remains that buying a car is still a lengthy and dreaded experience for the majority of consumers. And that is not good news for dealers.

A recent study of 200 dealerships revealed that the current purchase transaction, on average, takes up to an exhausting four hours. Consumers bear the brunt of this pain, but no one is really winning. Because, not surprisingly, knowing what they face the next time they walk into a dealership to test-drive and negotiate the price and terms of a new car, means many consumers are trying to skip the showroom visit altogether. A study from McKinsey found that car buyers visit 1.6 dealerships before buying – plummeting from 5 just a decade ago; and a recent survey from DMEautomotive found that, before purchasing, 16% took no test drive and a whopping 40% visited only one dealership.


The CFPB regulations, as challenging as they are, could, in fact, help turn this trend around by significantly improving the customer experience in the dealership. A key reason for this is that the negotiation of finance terms, monthly payments and interest rates would have to come to the front of the process. Dealers could not finance a vehicle without lender involvement and so the lender interest “buy rate” would necessarily become one and the same with the consumer contract interest rate/APR. Yes, this means that dealer participation, as we know it, goes away, but it shouldn’t mean dealer profits go away (more on this later).

So, how can dealers manage this change? Because likely CFPB regulations will necessitate that dealers determine the lender and final loan approval terms before contracting with the consumer, the financing “piece” must move forward in the sales process. The old system of interest rate guesswork and shot gunning loan applications would not be sustainable: managers can’t be writing contracts at 7.5% with the best-priced lender coming back with a 6.5% rate. In a post dealer reserve world, lender approval terms must be known, done, locked up and transparent at the point of sale – whether that’s online or in-dealership.

Whether or not the CFPB regulations come into play, this could rationalize the whole process. It would certainly offer a scenario that would make consumers more likely to finance with dealers. And, the good news? Profits not only remain intact because F&I managers are able to handle more deliveries, but lender rehashing and costly loan resigns are eliminated and penetration of profitable F&I products and services increase.

By implementing financing pre-approval online, forward-thinking dealers are already exploring the benefits of eliminating some of the consumer pain points in the vehicle purchase process. And consumers are very welcoming of this change.

In fact, recently took a look at consumer engagement in online credit apps and found that dealer websites using interactive, short form pre-approval credit applications, versus a standard long form credit application, see a huge uplift in submitted credit applications. A full 50% of those who start the process actually go all the way through to submit applications versus the 4% that complete a standard, long-form app. And there’s also a whooping 2,000% uplift in the number of applications submitted per month, from an average of two applications per month for dealers still using static long form credit applications, to 40 for dealers using the shorter, interactive instant pre-approval applications.

Even more interesting, according to a recent custom analysis of vehicle registrations and more than 1,400 dealers conducted by IHS Automotive, of those consumers that submitted an online short-form credit application, 54% purchased a vehicle, and those purchasing from the intended dealer saw average buy rates of 28%. In addition, e-LEND analysis of the IHS Automotive detail also showed that, for the Top 100 performing dealers, the average cost-per-car sold from these leads was less than $20. Top-performing dealers had closing ratios greater than 50%, much higher than the 6-8% closing ratio Cobalt cites as standard for 3rd party leads.

This is a clear indication that online pre-approval is a great way to start facing the changes CFPB regulations promise to bring because in our post-CFPB world, real loan terms will need to move to the beginning of the sales process – whether online or in-dealership. If you put it online, it means the vast majority of your customers will walk into the store with financing through your dealership already in place. And, if you choose the right online platform, the process will meet the CFPB regulations because the next generation of online credit application programs promise to have real lender loan terms baked in.

How will this work? Technology will marry the online credit app with an industry-neutral loan decision engine that matches the consumer’s credit profile and selected vehicle/ vehicle price to lender programs in real time. It can then generate real, final terms of approval and display it to the dealer or consumer instantly.
This delivers on the transparency in funding that the CFPB is requesting.

An added benefit is that a digital platform with lender integration at its core could take the whole sales/financing process to under an hour, eliminating costly loan rewrites and unwinds. This means consumers win, lenders win and the dealer wins.

Consumers win because they are provided the choices, transparency and immediate gratification they expect, all within a streamlined, integrated sales process. And dealers win because they are able to convert shoppers to buyers faster while delivering a more seamless workflow that reduces bottlenecks and risks to time, money and customer satisfaction. What could be better?

So if eliminating the dealer reserve ultimately brings more consumers back to the dealership and increases the efficiencies we so desperately need in the finance and sales process, these probably inevitable CFPB regulations could help, not hurt the industry.

Author: Pete Maclnnis

Author Bio: Pete brings over 40 years of experience in automotive finance and technology as Founder and CEO of eLEND Solutions™. Founded in 2003 as DealerCentric, Pete is leading the company’s evolution to an automotive FinTech company that specializes in digital credit and finance solutions designed to create a more efficient vehicle purchase process for the retail automotive industry.

Share this:


How Many Cars Are You Not Selling?

Estimate the impact ID Drive can have on your dealerships' volume, profitability and transaction times.

Our platform specializes in digital credit, identity, and finance solutions for remote and in-store shoppers - designed to accelerate conversions of digital end-to-end purchase experiences - concluding with a fundable, transactable deal structure.