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The Special Finance Divide

July 2004, F&I and Showroom - Feature

by Keith Tuber - Also by this author

How big is the gap between dealers and lenders when it comes to special finance?

Big enough to drive a car through.

Rapidly changing technology and market conditions combined with increased industry consolidation have widened the chasm between dealers and lenders when it comes to credit-challenged customers. This presents a serious dilemma -- particularly as credit scores continue to turn south. For the 12 months ended Sept. 30, 2003, personal bankruptcy filings jumped a record-setting 7.8 percent to 1,625,813, according to the Administrative Office of the U.S. Courts.

However, there is good news on the horizon. The principals recognize the issues that divide them and are taking strides to reduce -- if not remove -- them.

Technology Impacts Relations

"Lender consistency" is currently absent in the market, says Jim Jenkins, southwest regional manager for Bar None. Based in Silicon Valley, Calif., Bar None is an auto finance company that provides subprime consumer leads to dealerships.

"When I learned subprime so many years ago, I was taught to read credit and lender guidelines and make loan decisions on the spot for lenders using their own credit guidelines," says Jenkins. "I used that process until I exited retail in 2001 and it never let me down."

Today, Jenkins says, online finance platforms take the decision-making process away from underwriters by sending deals directly into a computer scorecard. This has impacted the personal relationship between dealers and lenders.

Very few of the 39 dealers Jenkins works with throughout California are allowed to spot deliver a car. "They'll all tell you they can, but when it comes down to it, they take an application even before they've met the customer -- even before they've seen stips -- and they'll input it directly into DealerTrack and get a loan decision," he says.

And it's nearly impossible to revive a deal that's turned down, he says, even if subsequent information is presented.

Gannesh Bharadhwaj, group director, product management for Household Automotive Finance, agrees that decline overrides are few and far between.

"There's a lot of historical data in terms of past performance that we can leverage against," says Bharadhwaj. "We're getting most of the information upfront to make that decision. I think DealerTrack helps with that because it gives the dealership an easy way to get that information to us so we can then pull up the bureau and make a decision."

Good Relationships Matter

Bharadhwaj says Household does still balance automated and manual decision-making. A good percentage of applications is sent to a credit officer to evaluate before the decision is relayed to the dealer. A Household portfolio management team member calls the dealer back on every deal to discuss how to structure it and make it work.

Personal relationships between dealers and lenders -- an essential component of the subprime practice in years past -- help bridge the gap. It has been the success formula for Juan Padilla, finance director of Orange Empire Auto Sales. Although his dealership averages just 90 to 105 units a month, Padilla specialized in subprime finance at several large dealerships throughout Southern California.

"I've gotten people with scores in the 490s and 480s bought at Fireside and WFS; people don't believe it," he says. "But if you have a good rapport with them, get everything up front and give reasons why, the finance guy's going to make a point or two for the dealership, and make more money for himself."

Working Around the Problem

Poor-credit consumers who are hard-pressed to get financed have created the need for "buy here, pay here" stores. These dealerships double as lenders and effectively eliminate the gap.

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