Articles: Marketing & Sales

Don't Panic About Lenders - History is Repeating Itself

Jack Lintol is the Chief Operating Officer for Auto Credit Express (ACE), Sub Prime experts who help dealers satisfy the need of Sub Prime consumers through their Training, Traffic and Technology products. ACE's senior management team has delivered tens of thousand of Sub Prime deals since the early 1990's. ACE has helped dealers across the country get into the Sub Prime business or improve their existing Sub Prime business ultimately increasing car sales and profits. Jack can be reached at (248) 370-6658.

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 lenders? Of course we know the rest of the story; all the aforementioned subprime lenders are history. Many of the remaining lenders got a lot smarter and so did the banks that lent them money. The lenders took a look 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. We saw the lenders collections percentages increase dramatically. These lenders 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 - through securitization.

So you may ask what this has to do with the current market conditions. We are all aware of the subprime mortgage mess and the fact that this has created significant waves on Wall Street. This has led to a very difficult environment, for those lenders who 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 lenders 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. Yes, Triad pulled out, but one must look to history and to the future to gain insight into what will happen in the next 6 months and beyond.

History tells us that if the business fundamentals are solid and there is a way to make money, then someone will lend subprime lenders the dough they need to crank it up again. Just like when securitization took hold in the late 90's and early 2000's, 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. RoadLoans.com, which was the direct lending arm of Triad, was sold to Santander Consumer USA. Santander is a very large well known Spanish bank that happens to own Drive Financial. Again, Banco Santander is well run bank and is highly profitable. They are not investing in subprime because they are a foundation, but because they are a corporation looking to make profits. Both of these are great examples of smart companies going against the grain.

The future tells us that we have more people that fall into the subprime category now than ever before. NADA says "As many as three out of five auto consumers suffer from damaged credit". I think that number is high; it is, currently, probably more like in the mid 40% range and will go over 50% in the next 3-5 years. There is no way that our country, or any other civilized country, can afford for these folks not to have transportation and the ability 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 "pretenders" are out of business. What I mean by that is those who got a few deals done through GMAC, Ford Credit or Toyota Credit that they never should have, along with those who got the "easy" good-bad credit customers (see the definition below) bought through other lenders. These are the folks who pretended to be in the sub prime business. They got 5-8 deals done a month and were heroes. Those days are over. You have to know what you are doing, know the lenders and not burn your relationships with lenders by sending them paper they won't ever buy.

We talk to and show people everyday how to deal with this rough climate - especially as it relates to dealing with lenders. 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 and we have gotten much smarter. Let me walk you through some of the things we share with dealers through our LotPro Sub Prime Selling System (our onsite and interactive video training) about lenders:

• Know the Lender Market - Your lender mix is not a static entity. You need to always be on the lookout for new lenders and listen to what they have to say.
• Have the Right Lender Mix -
  • This strategy assures the highest possible advance and lowest fee on every deal. It also plays a major role in customer satisfaction as it helps get the best rates and terms based on the customer's credit profile.
  • Have at least 10 and up to 20 lenders. Lenders with programs that cover not only the three basic credit types, Good-Bad Credit, Bad-Bad Credit, and First Time Buyers, but also lenders that specialize in specific credit situations such as Open Bankruptcy, High Debt Ratio, Short Job Time, and Lower Income.
• Good-Bad Credit -
  • Credit problems for Good-Bad Credit customers can 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 which is currently being paid, or have paid collection accounts.
• Bad-Bad Credit - Credit problems for Bad-Bad Credit usually 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 (i.e. people that are currently delinquent on all obligations, multiple bankruptcies, a repossession that was not part of a bankruptcy, significant bad credit after bankruptcy, past due on child support, repossessions less than six (6) months old, dismissed bankruptcies, a history of writing bad checks, a recently initiated credit counseling program, or a recent chapter 13 bankruptcy filing).
• First Time Buyers - These buyers have the highest loss ratios within the lending community and are often difficult to finance without a co-signer. These customers have a limited credit file and no previous auto credit.
• SAW Principle - Stability, Ability and Willingness to Pay - most lenders base their scorecard on SAW. Only after scoring will the equity position of the loan be decided. Know which lenders are stronger in the different areas.
  • STABLITY can be attributed to the applicant's time on the job, time at their residence, whether they are a home owner, renter, or live with their parents, how long they have lived in the area and their time in the credit bureau.
  • ABILITY refers to the applicant's gross monthly provable income, their payment to income and their debt to income ratios.
  • WILLINGNESS to pay refers to their past credit history. With most subprime lenders, more weight is placed on applied for credit items such as installment loans and credit cards, while less weight is placed on non applied for items such as medical bills and small collection accounts.
• Good-Bad Credit Lenders - 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 lenders are AmeriCredit, CitiFinancial, Consumer Portfolio Services (CPS), HSBC, National Auto Finance and Wells Fargo.
• Bad-Bad Credit and First Time Buyer Lenders - They are more liberal on the willingness to pay factors and traditionally have tiers with lower advances, shorter terms and higher fees. These lenders also require more stips.
  • Chase Sub Prime, Consumer Portfolio Services (CPS), Drive Financial, Tidewater Motor Credit and United Auto Credit Corp are examples of these types of lenders.
• Regional Lenders - Most of these tend to be Bad-Bad Credit Lenders. In the Great Lakes region, for example, we have: Nationwide, Mid Atlantic Finance Company, Regional Acceptance Corporation, Reliable Auto Finance, Atlantic Finance, Automotive Credit Corporation, Coastal Credit and Heritage Acceptance to name just a few.
• Portfolio Management Companies - In addition to sub prime lenders, there are also portfolio management companies. These companies are commonly referred to as "Buy Here Pay Here" lenders, the most popular of which is Credit Acceptance Corporation. The profit potential with these lenders 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 lenders. Another lender in this area, that should be mentioned, is Lender to Lender Financing.
• Situational Lenders - There are lenders who handle the following credit situations more often than other lenders:
  • Open BK
  • High debt ratio
  • Short job time
  • Lower income
  • Multiple repossessions
  • Credit counseling
  • Chapter 13 BK
  • Unpaid student loans
  • Unpaid tax liens
  • Unpaid Child support
  Since I have used up most of my allotted space, give me a call if you want me to show you lenders that handle these situations.
• Lastly, use the software desking tools that are in the marketplace to help you make smarter decisions faster. Our software system is called LotProOnline and information about it can be found at www.LotProOnline.com.

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 20-25% of their business) to be successful, so keep charging ahead and build a world class Sub Prime Selling System or find someone who can help you do it.

Have a productive rest of the month.

Published in the Special Finance Insider
August Issue 2008