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A Not-So Brave World

June 2008, F&I and Showroom - Feature

by Gregory Arroyo - Also by this author

I was on the F&I Forum the other day when I came across a topic post titled, “A Brave New Finance World.” And I have to tell you, after reading it I had to shake my head in disgust. I just really thought dealerships understood what is at stake these days.

The discussion thread started on April 11. One of the forum members rightfully complained about how her sales manager was angry with her for not billing a subprime customer without having the right “stips.” Basically, the guy didn’t have paystubs for his current job and she wouldn’t let the vehicle go without them.

Do me one favor. If you have the April 2008 issue of F&I magazine lying around, grab it and show it to your dealership’s management team. All you need to do is flip to pages 18 and 19 and have them read. As they go through those stories, make sure to highlight the following quotes:

“I think it’s going to be felt across the board … the consumer is going to feel it, the dealer and the finance company. That’s what happens when you go through a correction, which is what we’re going through now.”

“We have gotten a little conservative. We look at securities as a barometer for the risk we’re taking. This is what is driving lenders right now. If the asset-backed securities market isn’t doing well and there is no appetite, there will not be any loans.”

“Don’t panic, we’ve been through credit cycles like this before. If we can build strong habits, adapt best practices, we should be able to build a good foundation for the future.”

The first statement was made by Amy Martin, director of structured finance ratings for Standard and Poor’s Cooperation, at the AFSA’s Vehicle Finance Conference. The second quote was made by a bank executive at the same show. The third was made by John William Snow, chairman of Cerberus Capital Management LP.

What kills me is that we’ve been writing since the start of 2008 that evaluating risk was going to be huge with lenders. I even dedicated an entire column in February about Nomis Solution’s Price Optimizer, which allows lenders to price for risk based on several factors, including dealer performance.

Lenders are watching what we do. And we must all be aware of their predicament because it will impact our ability to finance vehicles.

So don’t feel bad when the sales managers get upset because you won’t move a vehicle. Lenders are doing the same thing, except they have software and new scorecards to help them. You have to take the same tact.

In fact, check out this month’s Developments section. We’ve got a story about how difficult it was to get a loan approved during the first three months of the year. Not only did subprime loan approvals fall 57 percent, loan applications for this segment had to be sent to more than five finance sources for an approval, according to CNW Research. Heck, even prime loans were sent to more than three lenders for approvals. Last year it only took 1.8 institutions.

And here’s the reality, Experian analyst Melinda Zabritski told me in May that the only lending segment that didn’t grow in February was prime. In fact, 30 percent of those consumers who purchased a new vehicle had scores below 700. Experian’s cut off for prime is 680.

On the used side, 62 percent of customers who purchased a vehicle were below 700. Looking deeper, 25.6 percent of customers who purchased a used vehicle in February fell into the subprime category, up from 21.4 percent in January.

Looking at Experian’s credit quality map, California saw credit quality fall 11 points from January to February. Texas saw a 36-point drop, and
Georgia saw its credit quality drop 30 points.

“Some states like Michigan are really depressing places to be in right now,” said Zabritski. “You see overall credit quality is degrading. Even the quality of subprime customers is degrading. I would definitely be concerned if I was a lender.”

Last year, the industry saw both subprime and prime growing, with consumers either improving credit or falling further behind. That’s not happening anymore.

And here’s what’s most concerning, you’d expect the prime segment to grow with lenders tightening credit criteria. Unfortunately, that’s not the case.

“It’s going to be interesting to see what goes on at the mid-year point,” said Zabritski. “Lenders are making a lot of changes, and they’re reviewing the changes they made a year ago when they began buying deeper. Those loans are still on the books, so it’ll be interesting to see how those loans are performing and whether guidelines will have to be tightened even more.”

Make sure you show management that last line.

What’s good is I think most F&I managers get it. We just need to get everyone else inside the dealership to get it, too.

“Part of the correction needed is not only going to be stricter lending practices, but not letting people think buying a car is like buying a pair of shoes,” wrote one F&I forum member. “If the banks are playing hardball, which they all are now, then I am too.”

I couldn’t have said it any better.

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