November 2008 - Feature
Our New Reality
By Gregory Arroyo
I was asked at the magazine’s September F&I Conference
and Expo when I thought this mess we’re in would turn around. My response was,
“Ask me again this time next year.”
If you’re looking for certainties, forget it. A state
association and a major research firm attempted to do that last January when
the “R” word (recession) was first being tossed around. Both said they saw a
recovery happening by the first and second quarter of next year, and that we’d
know for sure where we stood by the halfway point of this year. Unfortunately,
all we learned was the situation would intensify.
I think the biggest overstatement right now is that the
credit markets are frozen. There are some 10,000 lenders out there, so how can
the market be frozen? Yes, people with 700 credit scores aren’t getting through
like they used to, but we’ve said all year long that credit scores would no
longer be the single factor of credit worthiness.
Nomis Solutions’ Dr. Robert Phillips echoed that during his
keynote speech at the conference. His company is helping finance sources like
AmeriCredit, Ford Credit and Chrysler Financial put their market data to better
use. And these new strategies include examining the performance of loans
originated at your store the last few years.
If you don’t believe me, look at Bill Heard Enterprises.
A GMAC spokesperson said the decision to cut off the
89-year-old dealer’s floorplan financing was part of a regular review of credit
risk. Basically, the company took whatever action was necessary to mitigate
risk. And all you need to do is read the lawsuit filed by the Georgia consumer protection agency against “Mr. Big Volume” to understand what risk
GMAC was seeing.
So, for those dealers that didn’t do things right and fudged
income numbers to get customers into more car than they could afford, your fate
is already written. So don’t blame a frozen market for a lender disconnecting
your dealership.
The reality is we grew too fat. And I’m not pinning this
just on auto. However, we allowed too many consumers to dictate their credit
worthiness. Bottom line, we forgot how to say “no.” So the fact that you can’t
get a customer with a 700 credit score financed without proof of income should
not be a surprise to anyone. In fact, lenders hinted at today’s reality all
year long.
Take our People section. In August we published an
announcement about GMAC employing two new risk managers, positions that never
existed at the company. I’m sure both were familiar with Bill Heard.
So what’s our new reality? I can’t say exactly what the
bailout package passed in October will do, but I can tell you without a doubt
that it’s not going to bring back the good old days.
CNW Market Research, reporting on the first three quarters
of 2008, said subprime credit applications were being shopped at 3.5 more
institutions than the year-ago period. Even the number of institutions shopped
for prime credit applications doubled since last year.
The landscape is changing, and right now dealers are getting
better calls from local finance sources. Many of these local banks are even
buying deeper. Credit Unions also remain active, and they are also buying
deeper. Yes, there have been complaints about credit unions not playing fair in
the give-and-take game, but I think you’re only hurting yourself if you haven’t
explored their offerings.
The only draw back from those two lending segments, at least
from what I hear, is that they’re more reluctant about buying back-end
products. That’s not the case with the major lenders. The question then is,
what interest rate can your customer bear?
And like the 1,200 attendees heard at our conference this
year, there is no cookie-cutter answer to what lenders are looking for. The
reality is lenders are taking a more geographic approach to lending, as recent
data from Experian Automotive points out. Melinda Zabritski, director of
automotive credit, said lenders are incorporating a more geographic influence
to their lending programs, so lending practices employed in Dallas
won’t be the same as the strategies used in Houston.
Reality checks don’t always feel good, but sometimes they’re
exactly what the doctor ordered. The adjustments you need to prepare for are
smaller advances, limits on back-end products, and less tolerance for bad
credit.
We also need to get better at asking our customers for more
money down. As a percentage of the transaction price, down payments were
already reaching 19 percent in the third quarter, the highest mark in the last
seven quarters. It probably won’t be long before that hits 20 percent.
The unfortunate part of all of this is I don’t think Annette
Sykora, chairwoman of the National Automobile Dealers Association, was
overstating the situation when she said we could lose up to 700 franchised
dealers this year. That’s what happens during a correction.
So, while I won’t answer when I think this crunch will end,
I will say that I truly believe we’re going to come out of this. Why? What else
is there to hope for. Let’s just hope we’ve learned from our mistakes when this
thing turns around.