Dealers Reveal Finance Company Credit Tiers &

Customer Profiles

With the tumultuous ride the special finance industry has experienced in 2008, the finance companies that support the industry were at the center of discussions at the 2008 Special Finance Convention (sponsored by Auto Dealer Monthly and Special Finance Insider magazines) held in Dallas, Texas, in August 2008. 

In all, the finance companies and dealers engaged in over four hours of panel discussions, roundtables and breakout sessions. Most dealers, having experienced the contraction or the exit from the market by some of the finance companies they use, were on the hunt for the “hot player in the market.” The “aha” moment came when following these discussions they learned there was no “hot player,” with basically all dealers in the same situation.

Following a question-and-answer panel discussion by top executives from AmeriCredit, Capital One, Chase Custom, CitiFinancial and Drive Financial, dealer attendees were broken out into four different sessions based on either average monthly SF volume or skill/experience level. This featured discussion took place in the elite level breakout group where 62 dealership attendees (averaging over 80 SF units per month) took part in a 20-group-style forum discussing which finance companies they favored for specific subprime credit market tiers.

The group first defined the general characteristics of each tier or class. The primary factors governing each category are depth of file, employment, stability, and key ratios such as payment-to-income (PTI) and loan-to-value (LTV). Beacon or FICO credit scores were attached to these tiers in order to categorize them. The group identified nine tiers altogether—four based essentially on credit and five based on market niches.

Credit Tiers
The four tiers based on credit were what we will identify simply as Tier 1 (T1), Tier 2 (T2), Tier 3 (T3) and Tier 4 (T4). T1 represents the top of the subprime credit spectrum. Some finance companies will identify it as non-prime or near-prime. Whatever the semantics, the T1 customer has a deep credit file. They will have good employment time, be stable in the market, will have good ratios and, in earlier times, would almost be an automatic prime credit deal with the captive finance arms. Beacon and FICO scores representing this tier were identified as being between 580 and 620. In general, dealers reported receiving an average 125 percent LTV.

The elite dealers named Wachovia Bank as the number-one choice for this tier based on advance, fees and other terms. Capital One was named as a close second for customers in this tier. A key for Capital One is that the customer must be in the bureau for a minimum of seven years. Chase Custom was the third financing source named by nearly all the dealers. They also were the top finance provider for the independent dealers working with special finance.

Many dealers also look to credit unions for T1 customers. Indeed many dealers indicated that a significant portion of their T1 customers were now being sent through credit unions. Finally, for some franchise dealers these customers are able to be contracted through their captive finance sources at near-prime finance rates and no fees.

T2 is a step down in credit demographics. It is most often considered the typical special finance customer. Customers in this tier have shorter job times and less time at residences, but they still are relatively stable and have the ability to pay. A key in this category was that the PTI ratio has to be in line. While this category was identified by the attendees as having a credit score between 540 and 580, it was agreed that the advances were actually running higher in this category than those in T1.

Capital One was name the overwhelming leader in this category by the elite SF dealers. Generally, T2 customers wind up becoming tier-6 or tier-7 customers under Capital One’s subprime credit program. Similar to T1, dealers also named Wachovia Bank and Chase Custom as two additional top sources within this category, respectively. Other dealers included CitiFinancial as one of the top sources. AmeriCredit, Fireside Thrift and Regional Acceptance were also included as important sources within the T2 category.

T3 is a category that in prior years required more digging and research from SF managers, and was generally the bottom tier for which traditional discounted programs were available. Income drops off significantly for this tier, meaning PTI ratios are stretched to the max. This tier was characterized by Beacon or FICO scores of 475 to 540 and, in general, was the tier that most departments had been struggling for help with.

There was no strong consensus among the elite dealers as to the best finance companies serving T3. Chase Custom (since it has no FICO score threshold), CPS’ Standard program and Capital One (for customers with a score above 520) were mentioned most often. Wachovia was also named for deals that “make sense”. These deals generally advanced 125 percent to 135 percent total of average trade.

U.S. Bank Auto Finance was also named for scores above 525. Their program offers 100 percent of retail book, encourages rehashing deals and allows the credit buyers to look at all bureaus and pick the best one in order to try to make a deal. Finally, two smaller companies, Motor Vehicle Acceptance and Exeter were also named. Exeter is encouraging dealers to submit AmeriCredit or CitiFinancial turndowns and generally offers 110 percent LTV for the total deal with a 15 percent fee, according to the elite-level dealers.

Finally, T3 was the only tier where dealers mentioned Wells Fargo Auto Finance. They were noted here due to their Chrysler Financial pass-through program on new vehicles only, for which dealers claim they will consider anyone down to a 425 credit score. The last caveat is that the application must be submitted through Route One.

A good name for T4 would be the “Equity Tier.” This category was identified for those customers who could still qualify for indirect financing (rather than BHPH), but will be facing requirements for a significant down payment. Top advances in this tier will likely be 90 percent, and combined discounts and down payments of $3,000 or more are typical of this tier. While terms of credit being offered here may seem extreme, this tier’s defaults and charge-offs can easily reach 25 percent or beyond. Credit scores identified for this tier would be anything below a 475 Beacon or FICO.

T4 is first and foremost the tier that the elite dealers associated with Drive Financial’s Solution program. It offers a 90 percent advance on full-size trucks and SUVs, a 100 percent advance on most autos, and comes priced with a 25 percent to 31 percent fee. Vehicles must be under 55,000 miles and model years will range from  2001 to 2005 (based on the August books). Typical cash down for these deals will range from $1,500 to $2,750.

Looking past Drive, elite dealers named two other national finance companies as consistent sources for T4: Westlake Financial and Credit Acceptance. Westlake, located in Los Angeles, Calif, is privately held and currently does business in 34 states. The average deal has a retail selling price between $5,000 and $9,000, an ACV of $3,000 to $5,000 and, after fees, produces an average deal gross profit of $1,000 to $1,600. As a point of purchase program, Westlake doesn’t require a driver’s license and will take either handwritten pay stubs or a job letter for approval.

Credit Acceptance (CAC) was the third financing source widely named in this segment. CAC has historically been known as a portfolio-type finance company where the advances on the amounts-to-finance range from 55 percent to 65 percent, and then the dealer receives future payments depending on how their portfolio of business performs. They now have a Purchase Program that allows dealers to receive a higher up-front profit, with no future payments involved. This program was reported by some dealers as a viable option in lieu of Drive and Westlake and was said to be working well for vehicles that were in the $6,000 to $8,000 ACV range.

Finally, California dealers reported that both Lobel Financial and A-L Financial, both based in California, were good options in T4.

Niche Tiers
Five niche tiers were identified by the elite dealer group. More appropriately, it could be termed three niches, with one of those niches consisting of three sub-niches (all dealing with bankruptcies).

The bankruptcy niche revolves around individuals with recent bankruptcy filings. The first of which consist of customers with freshly-discharged bankruptcies (BKD), the second would be customers who have Chapter 7 bankruptcies that have not been discharged (BK7), and the third is comprised of those currently working through open Chapter 13 bankruptcies (BK13). All three of these bankruptcy niches are generally served by different financing sources.

The finance companies best serving the BKD niche at this time were identified as:

1.  Consumer Portfolio Services—specifically, CPS’ Alpha program with a 130 percent maximum LTV

2.  First Investors Financial Services (requiring a $2,500 minimum income)

3.  SAFCo

4.  The Mint Leasing – a subprime leasing alternative based in Texas

The BK7 tier covers all customers who have filed for Chapter 7 bankruptcy, regardless of whether or not they have had the Creditors Hearing (341 meeting). The finance companies serving this segment may or may not have varying periods of limited recourse (often until either the 341 meeting takes place or the bankruptcy is actually discharged). The companies serving this segment, in the order deemed by the elite-level dealers, are as follows:

1.  Prestige Financial Services
2.  CPS
3.  Tidewater Motor Credit
4.  Affiliated Financial
5.  Friendly Finance
6.  Service Finance (30 percent fee)

Finally, dealers reported and agreed that while there are a number of companies that may consider financing a BK13-tier customer, the best and most reliable source for that segment is Affiliated Financial. This program offers a 130 percent advance with an 11 percent fee.

The fourth niche is the first-time buyer (FTB) niche. The elite dealers agreed that options for this niche have been shrinking over the past 12 months, especially the past 90 days. This niche generally must have credit bureaus with no derogatory trade lines.

Regional Acceptance Corporation is considered by the elite dealers to have the top FTB program available. Again, ratios must be in line and advances are limited to 110 percent to 120 percent. A second finance company available for smaller amounts is Coastal Credit. Amounts-to-finance are limited to $8,500 at no more than 110 percent of average trade. The final company offered by the group was American General Auto Finance. With AGAF, the customer must have one year on the job, two– years at their residence and a PTI ratio no greater than 12 percent. Amounts-to-finance are limited to $12,000. Many dealers report that local credit unions and even small local banks can be very competitive in this segment as well.

The fifth and final niche defined is that of military personnel. For years, three sources have been used widely by dealers. With the tightening of capital, the dealers pegged the MILES program from Dealers’ Financial Services as not only the best option, but nearly the only option available. Under the MILES program, soldiers with the rank of E1 or greater will qualify. Their base program limits the advance on the vehicle to $13,000 with an interest rate of 17.95 percent. They will generally advance 110 percent to 112 percent of average trade on the vehicle (plus tax, title and registration) and up to 135 percent to 140 percent for the entire deal. A flat reserve is available, and you must sell the MILES warranty or GAP if you choose to present after-sale products.

Throughout the discussion of the credit tiers and the niche markets, dealers elaborated on some additional significant points. First, the SF market has changed substantially over the last six months. Benchmark conversion ratios, deal volume and gross profits have fallen substantially in 2008, even for the elite dealers.

Second, the only way dealers have been able to maintain sales volume is to adjust with the market, which has meant adjusting their SF inventory to match the financing programs available for the credit demographics the dealership serves.

Third, nearly every financing source is now looking at customer credit and the supporting documentation much harder than they have in the past. Gray-area calls, even for the elite, are certainly fewer and farther between.

Additionally, dealers were disappointed to learn that there was no “missing” finance company—one they were going to discover that would suddenly buy deeper and for more gross than the others they already had in their arsenal.

Finally, they acknowledged that due to the capital constraints for many of the finance companies, finance company preferences are very fluid. There are no assurances that finance companies serving particular tiers or niches today will be the same 90 days from now. It is a time when communication and relationships are vital, and a dealer or department can never afford to write off a finance source due to the inability to put a deal together today.