DALLAS -

EFG Companies offered four predictions and recommendations for the automotive lending and F&I market, formed through thousands of conversations with the nation’s leading automotive financial and insurance experts.

Steve Klees, senior vice president of specialty channels for EFG, indicated these insights reflect optimism for 2015. However, Klees acknowledged the year will not be without challenges

Here is the rundown from EFG:

Leasing Penetration Slightly Down

EFG forecasted penetration of leasing for new vehicles will be down slightly, especially towards the third or fourth quarter of next year. Meanwhile, a significant volume of vehicles are coming off lease.

“As the supply of late-model used cars comes into the market, used values will go down, pushing residual values down and making leasing not as attractive financially as the last three years,” Klees said.

Flat Compensation Programs for Dealers Will Increase

Feeling the pressure from the Consumer Financial Protection Bureau and the Federal Trade Commission, EFG projected that larger-volume indirect-lending banks will migrate to “flat” compensation programs for dealers.

Klees explained this transition will offset potential loan volume decreases with attractive incentives for floor plan and/or capital/commercial loans tied into a production agreement for indirect loan volume.

“For example, lenders could use this type of model to incentivize dealers to present their loans: 2 percent of unpaid balance amount financed and 50 basis point reduction on floor plan if annual loan volume stays at current threshold,” he said.

Certified Pre-Owned Vehicle Sales Will Be Robust

With the average price of a new model now exceeding $30,000, and plentiful off-lease vehicles back in dealer lots, EFG predicted consumers will look for a new-car experience (warranty/reconditioned vehicles) at a lower price point.

The average vehicle in the driveway is 11 years old, according to IHS Automotive.

“Customers know a 3-year-old car with the depreciation already reduced is likely to last for at least another seven to eight years,” Klees said. “Lenders should look for captive finance incentives and a potential opportunity for longer CPO warranty terms.”

Factory Incentives May Return

If the used-vehicle market takes a dip in price, EFG insisted the average trade-in value will also go down. Klees indicated that development means it will be difficult for consumers to be in an equity position on their trade-in.

“Traditionally, this has been offset with a financial rebate, but this trend all but disappeared during the recession and its recovery,” Klees said. “After 4 years of robust business growth, manufacturers will feel that the temptation to offer incentives will be too great to resist.  If one starts, many will join.

In addition, as Gen Y matures, pays off student debt, and has more income, demand for ‘value cars (high mileage, green, electric, hybrid) will steadily increase,” he continued. “Status and flash will disappear, and the American consumer (just based on sheer numbers) will migrate to more of a European (economic and value-based) mindset.

“Manufacturers have already recognized this and are increasing the number of high value models they carry,” Klees went on to say.