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Credit unions are becoming more aggressive in the indirect lending market, as credit aggregators are simplifying the process for dealers to finance auto loans through credit unions, according to the J.D. Power and Associates 2006 Consumer Financing Satisfaction Study.

Now in its 11th year, the study measures customer satisfaction with the new-vehicle financing process. Four factors are examined to determine customer satisfaction with automotive finance provider: provider offering, application/approval process, payment/billing process and customer contact experience.

The study finds that at a growing rate, credit unions are forming alliances with dealers to offer new-vehicle financing, representing nearly 10 percent of loans being issued in dealerships—up from nearly 7 percent in 2005 and 3 percent in 2004. Through the indirect lending channel, credit unions are providing more favorable rates, driven primarily by tax advantages gained from their non-profit status. They are also offering longer-term loans. These factors are particularly beneficial to consumers at a time of rising interest rates, as lower APRs and extended terms help to lower the cost of financing a vehicle.

“As the new-vehicle financing environment adjusts to increasing rates and compressed margins, credit unions are positioning themselves as strong competitors to the established captives, banks and independents, which is underscored by the fact that credit unions have historically provided excellent customer service through their very close, personal ties with their customers,” said David Lo, senior research manager of automotive finance at J.D. Power and Associates. “From the dealer perspective, credit unions are currently competing primarily on their rates and terms. Captive providers still have a significant advantage in other offering related areas such as a more competitive reserve and overall compensation per deal.”

Overall, finance provider satisfaction drops in 2006, primarily due to a broad-based shift in interest rates. Of particular note is the industry wide effect of the increasing Federal funds rate, which has caused all finance providers to increase their rates. The net effect of this increase is an industry wide decline in satisfaction.

Ford Credit ranks highest in the luxury lease segment for a second consecutive year, performing particularly well in provider offering. In the non-luxury lease segment, Ford Credit leads the rankings for a fifth consecutive year, receiving the highest ratings in provider offering and the application/approval process.

With strong performances in payment/billing and application/approval process, GMAC ranks highest in the luxury loan segment for a second consecutive year. GMAC also ranks highest in non-luxury loan satisfaction and receives the highest ratings from customers in three of the four factors that determine overall satisfaction: payment/billing, provider offering and application/approval process.

The study also finds that the use of electronic contracting (eContracting), which allows dealers to forego paper contracts by submitting an electronically signed document to capture customer signatures, has a positive impact on customer satisfaction. On average, customers whose contract was processed with eContracting technology are more likely to say they are “delighted” with their overall application/approval process when compared to customers who were processed with traditional documentation. In particular, the largest difference in satisfaction is in the ease of filling out paperwork.

“Currently, only 3 percent of customers report that their contract was processed using eContracting,” said Lo. “While the current penetration is very small, this proportion is likely to increase soon. In our 2006 Dealer Financing Study, we found that 75 percent of dealers who currently use eContracting expect the number of contracts processed with this technology to increase within the next 12 months.”

Posted under Automotive, Finance

Bank of America and J.P. Morgan Chase & Co. are reportedly in talks to end class action suits against their banks for allegedly allowing auto dealers to charge black consumers higher automobile interest rates than white consumers. The Associated Press this week reached spokespeople at both companies who confirmed that talks about the issue were taking place.

At issue is an industry wide practice known as “dealer markup”. Consumers who arrange financing through an automobile dealer are not necessarily given the lowest rate possible. The Detroit Free Press quoted an industry spokesperson in December saying, “”The fact that a dealer is compensated for obtaining financing should come as no surprise.”

But consumer groups have been surprised at how a consumer’s race can influence the amount of extra “compensation” a dealer attempts to charge.

Various studies have shown that consumers using GMAC, American Honda Finance Corporation and Ford Motor Credut paid different rates, and those rates correlated with race. Other studies have drawn similar correlations to gender. In a Vanderbilt University study of more than 300,000 transactions over four years, 43% of black consumers were charged a higher rate versus 22% of white consumers. The additional amount charged over the life of the loan also varied — from an average of $557 for black consumers to $227 for white consumers. Another study showed that black GMAC consumers spent an additional $350 over the life of a loan than white consumers.

“This is one of automotive retail’s dirty little secrets, ” says Consumer Help Web president Joan Bounacos. “Too many transactions have taken place for this to be a statistical glitch. Dealers and lenders were clearly charging African-American consumers more than they charged Caucasian consumers. That is unacceptable in 2004 America.”

The National Auto Dealers Association (NADA), the auto retail industry’s trade group, has continually defended the practice of charging consumers higher rates, but has also worked on education efforts to ensure compliance with the law. Those efforts include a training video offered for sale to dealers on the group’s web site for $169.

While denying any discrimination, both banks are apparently in talks now to cap the total markup dealers can charge to any consumer. Lender GMAC reduced its cap 2.5 percentage points in 2004.

Posted under Customer Service