Niche Financing:

The current state of the economy is changing all the rules. Foreclosures are up and consumer spending is down. Now more than ever, it’s important for dealerships to be equipped to serve customers from all kinds of financial backgrounds. No dealer wants to let a sale walk out the door because the right financing source was not already in place. Every dealership needs to know where to turn for niche solutions in order to have a well-rounded special finance department capable of handling a wide range of customers. With that in mind, here’s a look at just a handful of companies willing to take on those harder-to-finance buyers.

Affiliated Financial Corporation (AFC)
Affiliated Financial Corporation handles several finance niches. According to AFC’s national sales manager, Steve Stone, their niche programs are being redesigned as they go, changing whenever necessary as indicated by the market. AFC does not handle near-prime, only subprime. They will take first-time buyers, but Stone indicated that the segment is a small percentage of their business and not a niche they actively focus on.

AFC does have a military program but again it is not their primary focus. “Is that the niche we’re looking for? Not necessarily,” said Stone, “but if the deal is a good deal and falls within the structures that we have, we have no problem doing it.”

AFC will fund a Chapter 7 deal prior to the 341 meeting of creditors, and they require a trustee letter on Chapter 13 deals. “The advances have to be within reason…and it’s got to be basic transportation that helps [the customer] get back and forth to work,” said Stone. He reported that they have tightened their requirements over the past year. For example, he said, they will still fund a deal where the borrower has had a previous repossession, but they now require a greater period of time between the previous repo and the new loan being issued.

Stone reported that the company has established a bulk purchase division in order to purchase contracts from buy here pay here dealers. They believe that many of the deep subprime customers will end up having to go to BHPH lots for their vehicles. “I think that’s where our growth is going to come from,” he stated. AFC serves dealers in all states except Alaska, Arkasas, New York and Rhode Island.

Autobank Financial Services
Autobank Financial Services handles several niches, including open bankruptcy, first-time buyers and customers with no Social Security number. The company works with franchise and independent dealers in Texas, Florida, North Carolina, Georgia, Alabama and New Mexico and will be adding several more states very soon.

Chapter 7 bankruptcies must have the 341 meeting assigned. In some cases, depending on a customer’s profile and stability, the 341 meeting is required to take place before Autobank will finance the customer. Chapter 13 bankruptcy customers must have the approval of the trustee. First-time buyers must have two years on the job and $2,000 in monthly income, and will not be allowed a payment over $375 per month. While Autobank will also tackle deals with no Social Security number, such deals are approached with caution. The company has established a method for tracking down a number if they suspect one exists.

While the company’s evaluation process is not score-driven, according to senior buyers and underwriting co-managers Uri Szapiro and Derek Roehrig, they are currently trying to avoid the lowest credit tier and have increased their income requirements. However, Szapiro explained that they look at the overall picture on a case-by-case basis to evaluate a customer’s stability and ability to pay. They have tightened up on age and mileage requirements, but will still go up to nine years on age and up to 120,000 on mileage.

Autobank offers back-end participation, enabling dealers to collect 100 percent of the principal if their portfolio performs well. They also perform up-front verification of a customer’s information in order to prevent any surprises at funding.

Capital Asset Recovery
Rather than originating loans, Capital Asset Recovery specializes in the acquisition of existing Chapter 7 and Chapter 13 auto loans from finance companies and buy here pay here dealers. According to CEO Jamie Coates, this is a very specialized niche because only certain methods can be used to collect on these types of loans. “It’s a legal issue at that point,” he pointed out. “This is not like any other part of collections, period.”

There are advantages to be gained by selling off bankruptcy paper. The dealer can avoid the trouble of repossessing the vehicle and trying to collect on a borrower in bankruptcy. Coates explained that in a best-case scenario, a dealer may only collect between 30 and 50 percent on those notes. “If you take a guy selling 50 cars a month and he’s been doing it a while, he’s got a large portfolio,” said Coates. “Let’s say he’s got a million dollars’ worth of bankruptcies and someone comes along and offers to pay him $350,000 to $450,000. It doesn’t take him long to figure out how much that money will turn around and buy new cars and reissue new notes at 20 to 25 percent … If we do our job right, we’re going to pay those guys more than they’re going to get anyway.”

Capital Asset Recovery will purchase a bankruptcy loan anytime between the 341 notice until dismissal or discharge, and they purchase loans in all states except Alaska and Hawaii, with limited purchasing in California. Their biggest concentration is in the Midwest and Southeast. Said Coates, “Typically, our hardest job is to get someone to look at the numbers, because if you get right down to it, bankruptcies are such a small part of their entire portfolio that it really doesn’t raise itself as much of a problem. The other side of that is, though, they’re giving money away. Now, whether it’s a dollar or a million dollars, to me, it counts.”

Dealers’ Financial Services (MILES Program)
Dealers’ Financial Services created the MILES Program (Military Installment Loan and Educational Services) for active duty military members who have no credit or poor credit and cannot obtain financing through a bank or credit union. “The MILES Program was created to be the best alternative to bank or credit union financing for an active duty service member,” said Jenny Wallace, assistant vice president marketing manager for MILES.

The program is partnered with US Bank and maintains a National Certified Dealer Network. Dealers in the network must agree to adhere to pricing limitations as well as quality and mileage criteria. A used vehicle must have a clean history report, have fewer than 65,000 miles and be no more than five years old. Terms are limited to two times the service member’s enlistment or a maximum of 60 months. The sale price of a new vehicle cannot be more than $400 over MSRP; used vehicles cannot be priced higher than book retail.

The program is criteria-based, rather than relying on credit scores. The loan amount is determined by the service member’s debt-to-income ratio with a maximum amount of $25,000 and a minimum down payment of $500. Rates range from 12.2 percent to 18.45 percent for both new and used vehicles and average loan-to-value is 135 percent. The MILES program also offers a fixed rate loan, equity rate buy-downs, no discount fees and back-end profit without chargebacks.

According to Wallace, business has been on the upswing. “This is our third consecutive year of growth, and we are up 27 percent in originations over 2007,” she stated.

Drive Financial
Drive Financial’s programs are broken down into three tiers—One, Complete and Solution—but can be employed to help dealers serve niche customers. “One is more the near-prime set or the top of the credit spectrum that we serve and has fewer stips and fewer fees, and then Complete and Solution continue to increase as their risk increases,” explained Laurie Kight, communications director for Santander Consumer USA/Drive.

“It’s a combination of a lot of factors that are taken into account,” she said. “Generally speaking, our typical customer either has credit issues or little to no credit experience and so one of the things that we looks for – and this would certainly cover open bankruptcies, military and first-time – is stability and ability to pay.”

In open Chapter 7 or 13 situations, Drive requires a letter of discharge or approval from the trustee. They prefer for bankruptcies to be recently discharged and for there to be no major derogatory since the discharge date, and there are generally higher fees involved.

For military buyers, Drive needs a copy of their current leave and earnings statement, valid identification and a completed allotment. Because the allotment takes extra time to process, they also require the first payment. For first-time buyers, proof of income, proof of residence and proof of employment are required. One year at the current residence and one year with the current employer is preferred, along with a five-year history of where the customer has lived and a phone at the current residence. However, Kight said, they will look at the whole picture for that customer and will evaluate that deal keeping in mind the dealer’s overall portfolio. She stated that Drive will also handle customers who are self-employed, although it will require different stipulations for proof of income.

While Drive’s requirements have gotten tighter over the last year, Kight pointed out that they are always watching for the market trends and will adjust those requirements as needed. She stated they have seen quite a bit of overlap amongst their three tiers in recent months and are looking at those tiers to determine whether they are still meaningful and how effective they are for dealers.

“We have always been a company that prices for the risk that we take and that’s one of the reasons we are able to serve the set of customers that we serve,” said Kight. “That ensures that we’re going to be able to offer our products to dealers for the long haul.”

Mid-Atlantic Finance Company
Mid-Atlantic Financial, headquartered in Clearwater, Fla., handles military and first-time buyers in the subprime and near-prime areas, as well as customers with dismissed Chapter 7 bankruptcies. The only requirement for military customers is that they be set up on monthly allotments. For first-time buyers, Mid-Atlantic requires at least six months on the job and a down payment equal to 10 percent of the amount financed.

Mid-Atlantic modified its program over 15 months ago, according to Scott Moles, vice president of operations. “We added the near-prime customer, but we’re still mostly subprime. We also added the military and the ability to buy the BKs, so actually we opened up the program and just adjusted the rates accordingly to do this type of business,” he explained. Not much in their program has changed since that time, despite recent shifts in the economic climate. He added that 95 percent of their portfolio is strictly subprime.

Mid-Atlantic is still funding daily and services loans in 30 states across the country. Moles reported seeing an influx of people looking for financing options over the past few months and cited the halting or slowdown of approvals by many of the major players and the move away from anything subprime. He admitted that volume is down somewhat but stated that Mid-Atlantic is still moving forward and is very comfortable with their current level of volume. “We have a very good market of dealers across the country.”

Prestige Financial Services
Given the current economic climate, the open bankruptcy niche in particular could see a lot of new customers. Scot Seagrave, a senior vice president at Prestige Financial Services, revealed that as a share of their year-to-date origination volume, open bankruptcies have increased by 50 percent over the same time period last year. “We’re anticipating some good bankruptcy business over the next six to 12 months,” he said. “[Chapter 13] could be a tremendous opportunity for any dealer out there who’s willing to put in the time and the energy, because those dealers that send us a lot of Chapter 13 business pretty much own the Open 13 market in their area.” He cautioned, however, that it could take two or three months for a dealer just getting into Chapter 13s to begin to see the results of those efforts.

Seagrave described Prestige’s program as a “full-spectrum, full-service bankruptcy program.” He stated that their open Chapter 7 and open Chapter 13 programs have the same advances and fee structure as their non-bankruptcy programs. Chapter 7 deals require the 341 meeting to have already taken place, and Chapter 13 deals require a letter from the trustee.

Prestige’s double-bankruptcy program, Seagrave explained, is a little more restrictive. The program, intended for customers who have filed for bankruptcy after having a previously discharged bankruptcy, limits the payment and loan-to-value. Their typical double bankruptcy customer is often a Chapter 7 customer. Prestige shies away from customers who have had a previous bankruptcy dismissed outright. Seagrave explained their reasoning: “Our thought, with dismissed 13s in particular, is, here was their second chance. They filed for bankruptcy, and then they didn’t follow through on that. Do we really want to be their third chance?”

While Prestige has not been immune to the credit crisis, Seagrave said, “Our bankruptcy customers are performing and performing well…We’re not tightening anymore and in fact we’ve actually loosened requirements for our bankruptcy customers because they continue to outperform other customers by and large in the subprime arena.” Prestige is currently serving franchise dealers in 16 states.

Tidewater Motor Credit
Tidewater Motor Credit specializes in open/discharged Chapter 7 deals in 30 states across the country. Every dealer is assigned to a buying team, and each deal is evaluated on an individual basis, looking at a customer’s stability and ability to pay rather than relying on an internal scorecard or Beacon score.

Tidewater’s program allows for advances up to 120 percent of NADA trade value and up to 140 percent out the door, with average fees around $395. According to National Sales Director Chris Lewis, their plan is designed for limited discounts and larger advances and offers a way to assist customers who were once prime credit customers. Lewis stated that a Chapter 7 deal can be done on recourse prior to the 341 meeting of creditors and said Tidewater will fund deals after the 341 meeting with no recourse.

In recent months, the company has shifted focus away from the lowest credit tiers and first-time buyers, instead zeroing in solely on open and discharged bankruptcies. They have also cut back somewhat, focusing mostly on those dealers with whom they have long-standing relationships.

“We’re still out here doing business … just trying to weather the storm like everyone else,” said Lewis. He indicated there might be a number of franchise dealerships pursuing bankruptcy business that have lost their finance sources. These are the dealers Tidewater is currently looking for. “We’re just focusing on those franchise dealers that have an aggressive special finance department set up just to target open and discharged bankruptcies. That’s the dealer that’s really going to have a need for us right now.”

Westlake Financial
Westlake Financial offers a fair amount of flexibility to dealers needing finance solutions for several types of customers. There are no requirements for job time or income, although there is a minimum down payment and a term requirement.

According to Westlake’s president, Ian Anderson, all deals are broken down into three parts by which they are evaluated: intent (credit bureau), ability (job type and time, income, residence time) and structure (loan size, payment, loan-to-value). Depending on the customer, one part may outweigh the others, but they must balance. Anderson stated that, while they will buy any FICO score, they have tightened up a little on advances and requirements. “For example,” he said, “if I have a customer that has weak credit, I will need better structure.”
 
First-time buyers are required to have 10 percent down, and Westlake will evaluate the deal based on their income, time on the job and type of job. The only requirement for military customers is that they be on allotment. Anderson indicated they look at open bankruptcies on a deal-by-deal basis and offered no general guidelines for such deals.

“We’re very flexible,” he said, adding that they have a program available for which there are no underwriting criteria and in which they share in the performance with the dealer. He also indicated that they would handle a buyer with no driver’s license. “We require a certain amount down and a certain advance,” said Anderson. “We’re willing to take that risk if the structure is right.”

Westlake serves both franchise and independent dealers in 35 states, and according to Anderson, that number will continue to grow.