Don't Panic About Finance Companies - History Will

Repeat Itself

It’s the late 90s all over again, but different this time. Remember when Jayhawk, NAC, Mercury and many others were beating the daylights out of each other and advancing way too much to steal contracts from other companies? Of course we know the rest of the story; all the aforementioned subprime finance companies are history.

Many of the remaining companies got a lot smarter and so did those that provided their money. The finance companies looked at all of their historical customers, as well as their payment histories. They developed automatic decisioning tools that allowed the computer to look at the thousands or millions of contracts they had funded and how those customers paid. These finance companies found that it was difficult to borrow money the way they traditionally had in the past, so they turned to what was a new way for them to borrow money—securitization.

So, you may ask what this has to do with the current market conditions. The subprime mortgage mess has created significant waves on Wall Street. This has led to a very difficult environment, for those finance companies that are not banks, to securitize their portfolios, hence tightening their ability to get money to lend to people with bad credit. This is the major reason finance companies are cutting back on dealers and tightening programs—a limited amount of cash. Most of these companies’ financial fundamentals are solid, even though their delinquencies have increased.

History tells us that if the business fundamentals are solid and there is a way to make money, then someone will lend subprime finance companies the dough they need to crank it up again. Just like when securitization took hold in the late 90s and early 2000s, a new credit facility will emerge to give this market liquidity.

In this light, we have a new entrant into the marketplace in Sixth Gear. Warburg Pincus invested $250 million and Sixth Gear raised another $750 million in debt. I can tell you first hand that the folks at Warburg aren’t a bunch of dummies and don’t throw that kind of money around lightly. They smell profits and opportunity in the water.

Santander Consumer USA has agreed to purchase RoadLoans.com, which was the direct lending arm of Triad. Santander is a very large well-known Spanish bank that happens to own Drive Financial. Again, Banco Santander is a well-run bank and is highly profitable. They are investing in subprime because they are a corporation looking to make profits. Both of these are great examples of smart companies going against the grain.

The current economy indicates that the more people will fall into the subprime category in the future. According to NADA, “As many as three out of five auto consumers suffer from damaged credit.” There is no way that our country, or any other civilized nation, can afford for these folks to be without transportation due to the inability to finance it. If all that lending activity were to stop today, you would see this economy come to a screeching halt. It will not happen!

What does that mean to all of us in the car business? We have to figure out how to navigate through the rough waters until new sources appear. The “subprime pretenders” are out of business. Dealers who got a few deals done through captive finance companies that they never should have, along with those who got the “easy” good bad-credit customers (see the definition below) bought through other finance companies are gone. They got five to eight SF deals done a month and were heroes. Those days are over. You have to know what you are doing, know the finance companies and not burn your relationships with these companies by sending them paper they won’t ever buy.

Many of you know we have our employees running subprime departments in Michigan, Indiana and Ohio and our numbers remain solid. It has gotten much harder lately and we have gotten much smarter. Let me walk you through some of the things we often share with dealers:

You must know the finance company market – Your finance company mix is not a static entity. You need to always be on the lookout for new companies.

You must have the right finance company mix for customer credit. This strategy assures the highest possible advance and lowest fee on every deal. Have at least 10 and up to 20 finance companies to address a wide range of needs.

• Good bad-credit finance companies - They are more liberal on the stability and ability factors and traditionally have tiers with higher advances, longer terms and lower rates. Additionally, they require less stips. Examples of these types of companies are AmeriCredit, CitiFinancial, Consumer Portfolio Services (CPS), HSBC, National Auto Finance and Wells Fargo. These companies serve customers whose credit problems can usually be associated with one significant economic disaster or event in the past (i.e. divorce, sudden injury or illness, loss of employment or bankruptcy due to business failure).Unless there is a fresh bankruptcy, these customers will normally have good credit items after their bad credit. For example, they may be paying on an open credit card account, have a vehicle loan currently being paid or have paid collection accounts.

• Bad bad-credit and first-time buyer finance companies - They are more liberal on the willingness to pay factors and traditionally have tiers with lower advances, shorter terms and higher fees. These companies also require more stips. Chase Custom, Consumer Portfolio Services (CPS), Drive Financial, Tidewater Motor Credit and United Auto Credit Corp are examples of these types of finance companies. These companies serve customers whose credit issues cannot be linked to a single event, and this person has a long history of credit abuse. If the customer’s credit problems can be associated with a single event, that event is happening right now.

• Regional finance companies - Most of these tend to be bad bad-credit finance companies. In the Great Lakes region, for example, we have: Nationwide, Mid Atlantic Finance Company, Reliable Auto Finance, Atlantic Finance, Automotive Credit Corporation, Coastal Credit and Heritage Acceptance to name just a few.

• Portfolio management companies - In addition to subprime finance companies, there are also portfolio management companies. These companies are commonly referred to as “Buy Here Pay Here” finance companies, the most popular of which is Credit Acceptance. The profit potential with these companies may be limited on the front end, but a number of subprime power-house dealers have had great success building long-term back end profits with these finance companies. Another company in this area that should be mentioned is Lender to Lender Financing.

• Situational finance companies. - There are companies who handle the following credit situations more often than other companies:
o Open BK
o High debt ratio
o Short job time
o Lower income
o Multiple repossessions
o Credit counseling
o Chapter 13 BK
o Unpaid student loans
o Unpaid tax liens
o Unpaid Child support

If you need help with one of these, email me and I will be happy to help you find a situational finance source.

Lastly, use the software desking tools that are in the marketplace to help you make smarter decisions faster.

So as you can see, I believe that this too shall pass. You need to improvise, adapt and overcome in order to be able to navigate through the current economy while continuing to grow your subprime business. More importantly, don’t give up as some dealers have done. Stay in the game. Dealers will need to be proficient in subprime (doing at least 20 to 25 percent of their business) to be successful, so keep charging ahead and build a world class subprime selling system or find someone who can help you do it.
 
Vol. 2, Issue 4