You Can't "Bank" on Near-Prime Finance

Recently, the question was asked by this publication, “Is Special Finance Dead?” The answer was, and is, a resounding, “No!” The same article, however, pointed out that, on many financing fronts, near-prime auto loans are a vanishing breed. This is true when applied to nationwide banks and finance companies such as AmeriCredit, Capital One, Wachovia, CPS and Regional Acceptance. From what I’ve seen, these giants (and others) have pulled out of the mid-range interest rate loans that live between credit scores of 570 and 670.

I direct the finance department at a small, independent dealership in a city of 80,000. In the last year, we have experienced record profits since most of the so-called big boys mentioned above eliminated us from their dealer rosters. That record growth has been facilitated almost entirely by near-prime loans—loans that routinely are structured using up to 140 percent of NADA or Kelly retail values with generous back-end allowances and hundreds of dollars of finance reserve. Our average credit score over the last six months, through the end of November, was 587 with above average gross profit.

I would like to be able to tell you that my 22 years of subprime experience, along with my unwavering dedication to a job well done on behalf of my dealer principal and, of course, my dashing good looks have brought about this tremendous success during these difficult times. Yeah, right. Fortunately, I am blessed with generous, forward-thinking owners, and a staff of true professionals.

The ancient Greeks have a saying carved on the portico of The Parthenon in Athens. Translated into English, it says, simply, “From crisis springs opportunity.” As we continued to lose finance companies over the last 12 months, opportunities arose to establish relationships with institutions that, heretofore, we often ignored save for prime or super-prime loans. Those institutions are local and state-wide credit unions.

Here in Kansas, we have cultivated ultra-successful relationships with what I call our new “Big Three,” KU Credit Union, Boeing Wichita Credit Union and Golden Plains Credit Union. Their names are not as important as the fact that they each do “zero” scores and first-time buyers and have credit tiers that go as low as the mid-500s. Another seven or eight credit unions have done an excellent job complimenting those three through our membership in CUDL (Credit Union Direct Lending), which is available, for the most part, nationwide. We have also started a new relationship with a brand new credit union “middle-man” called OAG Indirect, out of Tulsa. It, too, after very quick funding on our first deal with them, looks promising.

A few years back, while the Feds were apparently ruining the banking industry, they passed a handful of laws that made joining and using credit unions easier for the general public. Credit unions answer to a different set of regulations than banks, and they are certainly not affected by the lack of securitization, which is plaguing finance companies these days. I have been told by every credit union in our stable of finance sources that one of the odd byproducts of the current banking crisis is that they are bursting at the seams with money to loan.

It seems that the negative media hype has convinced the public that, since banks are in turmoil and not loaning money, it must be the same for credit unions; it is not. Credit unions are eager to do more business, not less. Before submitting this article, I verified that this trend is not unique to Kansas. One of my best friends in the business is killing his competition in Texas through his relationship with one local credit union. Other similar successes, I am sure, exist across the country.

I have had enlightening conversations, of late, with some of the leaders of the aforementioned credit unions. They were not swept up in the madness of subprime mortgages, and since they are more “community committed,” they are willing to take a chance on their local population. They are not granting loans from a corporate office 3,000 miles away from Lawrence, Kan. Customers can make their car payment every month at the credit union drive-thru here in town. I honestly believe that the local slant has a great deal to do with the credit union’s delinquency rates being lower than those of out-of-town banks and financial institutions.

Another important factor you need to remember as you go searching for your credit union heroes is that they enjoy interaction with their dealers. They want to meet you, see you, and they have no problem soliciting your help if a loan starts to go sideways. Be proactive, call on them often, and offer your help and local knowledge before it is asked for. Every month that goes by, as their level of trust rises, they buy deeper. Credit unions have guidelines, but they are not restricted by a national lending grid. If they like the deal, to heck with the credit score; they’ll buy the loan. They also love co-buyers.

Virtually every city, regardless of size, has credit unions that do business in their area. Do a little old-school prospecting. Call on your locals. Sign up with CUDL and OAG and revive your subprime department with high-gross, near-prime deals.