Drive Financial

Tom Dundon, CEO of Drive Financial was quoted in December 2006 as having said, “We believe we are poised to become one of the leading companies in our industry.” It was a bold statement at a time when subprime finance companies in the automotive space were a dime a dozen. A lot has changed since then, but Drive Financial is still alive and performing well in the automotive sector, which is more than many finance companies can claim today.

In late 2006, Drive Financial was acquired by Banco Santander Central Hispano. Santander is one of the world’s leading banks by market capitalization and specializes in retail banking, consumer finance and asset management and insurance. As impressive as that sounds, all dealers really want to know is: How can I work with Drive to sell more cars? While in Dallas recently, Tom Dundon sat down to answer that question along with several others.

How does Santander feel about the volatile automotive finance climate in the U.S.? Auto finance is a core business for Santander. They originate loans in more than 12 different countries around the world. They have the benefit of having seen many different economic environments and cycles. This experience has been extremely beneficial in helping us navigate the difficult environment our industry is facing. We are fortunate that they have run their business with the same discipline that we run ours, and therefore we are one of the few companies with the liquidity to continue growing our portfolio. They support our business model, and they have the experience needed to look past this economic environment and plan to help us support our dealers even while other companies are running out of liquidity.

How has Drive adjusted to the changes in the market lately?
We were clearly one of the first companies to realize things were getting too competitive. Advances were too high, loan-to-values were too long and margins were getting too thin, and although it benefited many dealers for a period of time, it was not sustainable.

Due to the ease of access to liquidity, there were lots of competitors entering the market, which forced margins down and loosened underwriting. What has happened in the market had to happen. We saw it coming. We even tried to fight it for a while, but finally, we said enough and took our volume from $360 million down to $225 million per month. Not because we didn’t have the liquidity, but because that’s the amount of business we could do the right (sustainable) way.

Our hypothesis is that the number of finance sources who price loans cheaper than us is going to continue to shrink. What we are doing is choosing to use our liquidity for the dealers who give us clean deals, on clean cars and have good closure rates. Good cars are very important to the process. If a dealer reconditions the vehicles properly and makes sure the customer is getting something that they both want and can afford, we find loan performance is much better. The way we are currently underwriting today is reflective of where price and structure should be in a normal funding environment.

Is Drive currently doing the volume of business that they would like to do?
Absolutely not; we would like to do more volume. Dealers often have other, cheaper choices still available to them. What we know is that we are efficient operators in all that we do. We have cheap cost of funds and excellent credit risk management. Companies that buy cheaper than we do will probably lose money over time. We want to do more, but they have to be good deals at the right price.

Dealers often think your programs are too expensive to use. Are they overpriced?
It frustrates me when I hear that. Our programs are simply based on risk. We charge based on risk—risk that is calculated based on years and years of actual data. When we set fees for a loan, we know what our costs are for the risk, and we will give the dealer the best shot we possibly can to sell a car. The dilemma is, if you are a dealer, your incentive is to take the best deal at the moment. We never let the fact that the dealer has another option influence our decision making process. One of the ways we are going to be able to lower the price and help dealers sell more cars is by focusing on dealers who give us the best deals.

Some dealers are appalled at your $3,000 fees on some deals. What do you say to them?
Those are not our favorite deals either. I’ve heard dealers complain that they can only make $500 on a deal with a $3,000 fee. We approve a wider range of customers, but deals with fees at that level are statistically very risky deals with a high loss ratio. We’d prefer to buy better deals with lower risk and charge lower fees. We want to give the dealer the lowest price possible to help them sell a car at a price that allows us to operate with an acceptable profit margin for the risk we are taking. We are constantly analyzing the data to find ways to lower losses, so we can lower price.

Who do you do like to do business with?
Ongoing business relationships are reviewed for profitability and based on portfolio performance and closure rates. We want dealers who help the customer find a car they really want to own and that they can definitely afford. If the car is reconditioned properly and the information on the credit application is 100 percent accurate, we have the perfect dealer.

What are the biggest influencing factors in a dealer’s portfolio performance?
Collateral is huge. There is a large disparity among dealers based on the type of collateral they give us. Certified, properly reconditioned vehicles perform much better than something with some hair on it that a dealer is just trying to move. We [finance companies] have enough data to know this is a fact. Dealers need to understand that, over time, if they continue to sell problem vehicles, it will affect their ability to have finance options. We pull vehicle condition reports and have quantitative data to prove that the condition of the vehicle affects the performance of the loan.

Dealers’ sales practices are another huge factor. The customer needs to love the vehicle. Dealers who take the most challenging credit customer and match them up with the vehicle the dealer needs to sell the most creates a high-risk loan, especially when they max out the payment to income ratio. In the past with so many finance options, dealers had no reason to do otherwise. These practices have caused higher repossessions, higher losses and ultimately fewer finance options. To keep finance options available, dealers need to make sure that the finance companies get good vehicles that customers really want to buy; then, ultimately, the money will be passed back to dealers.

What other changes do you see coming in the industry?
Finance companies have known for some time which dealers have low closure and poor performance, but they were slow to act on it. Now they have to hold dealers accountable for maintaining a reasonable closure rate and originating car deals with integrity.
 
Are you currently signing dealers up?
Yes, but as I mentioned, to stay on our program dealers need to be accountable for the things we discussed earlier. We work hard every day to be accountable to our dealers. We scrutinize every step of our sales, underwriting and funding processes to make sure we are serving our dealers. We do business with franchise and select independent dealers.
 
Do you rehash deals?
We do rehash to help dealers structure a loan and make sure we don’t miss a car deal because we did not take the time to relook to see if our systems missed something. Our buyers are one of our best assets. They know how to put a car deal together. Our data models can only take us so far. We don’t usually rehash declines unless they have real equity. Real equity is not $1,000 today; it’s more like $3,000 to $5,000. Since we buy deeper than other national finance companies, we feel comfortable that our declines need to stay declines. Additionally, dealers need to know our statistical data shows that declined deals that are overturned have an 80 percent chance of default, hence why we rarely overturn a decline.

Do you have a scorecard or program guidelines that will allow a dealer to know if a customer fits one of your programs?
Yes, our program guidelines are distributed by our salespeople. The best way to know if a customer qualifies is to submit the application. Our scoring models are complicated but automated so we can give the dealer a callback in seconds. The days of having to know all the layers of a program are long gone because most all finance company programs are so complicated, it takes longer to review them that it does to submit it and get an approval. We recommend that dealers submit all applicants that meet our minimum income criteria and have the stips needed to get their deal funded.

Describe your current programs.
We like to have a minimum of $7,500 financed. Our ONE COMPLETE SOLUTION™ programs buy loans across the subprime credit spectrum. The ONE program targets customers with a FICO range between 560 and 640. These customers get the best price and structure and are our least risky credits. As we take more risk, our structure gets tighter and down payment minimums increase. The COMPLETE program is essentially the same customer with a few more credit issues. Fees are a bit higher, still has high advances, but losses are a bit higher. Then, there is our SOLUTION program for the credit customers with the highest risk. Fees are higher due to the risk, advances are lower and losses are much higher.

Do you have anything new in the works?
Actually, we do have a new program in the works that we haven’t even named yet. It will be a program that will reward dealer performance. Our fees for dealers who give us the right type of deals will be dramatically lower, and it will be 100 percent in the dealer’s control. It’s not quite ready yet, but it is coming.