Can We Panic Now?

Jack Lintol feels your pain. As the COO of Auto Credit Express (ACE) and a veteran trainer and speaker, he has visited hundreds of dealerships across the U.S. He knows how peaks and valleys in the credit cycle affect dealers, lenders and customers. Special Finance sat down with Lintol to discuss the state of the current market and what he’s learned from his years in the automotive finance industry.

SF: Can you give us some background on yourself and your company?

JL: My experience in subprime began in 1994, when I went to work for Credit Acceptance. Auto Credit Express was launched by Rich LaLonde in 1992. Rich started in the car business in 1981. Just prior to starting ACE, he served as the general manager for Agency Rent-A-Car dealerships, where he outsold other Agency regions three to one. At ACE, we offer a wide array of products to help dealerships streamline their subprime sales process. That includes turnkey outsourcing of subprime operations, an online selling system, and entry-level to advanced subprime sales and finance training and lead generation.

SF: As a veteran in the special finance arena, what’s your take on the current market?

JL: I see it as the late ’90s all over again. Many of your readers will remember when subprime lenders such as 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. They’ll also remember that all three of them, and several others, went out of business. The lenders who survived got a lot smarter, and so did the banks that lent them money.

SF: Smarter how?

JL: They took a hard look at all the customers they’d financed in the past and developed automated decisioning tools to scan the thousands or millions of contracts they had funded. They looked at how promptly different customers had paid and changed their origination standards to try to improve their performance. After a while, they began to see their collections percentages increase dramatically. However, they also found that it was difficult to borrow money the way they had in the past.

SF: And that was in the absence of the housing and finance crises we’re experiencing today.

JL: Precisely. We’re all well aware of the subprime mortgage mess and the waves it has created on Wall Street. Lenders that are not banks are finding it difficult to securitize their portfolios. That makes it even more difficult to get money to lend to people with bad credit. That’s the main reason why lenders are cutting back on dealers and tightening advances: They don’t have a lot of cash to throw around. Most of these companies’ financial fundamentals are solid, even if their delinquencies have increased.

SF: So what hope do you hold for the future? Is it time to panic yet?

JL: Not at all! History tells us that if the business fundamentals are solid and there’s a way to make money, someone will lend subprime lenders the dough they need to crank it up again. Just like when securitization took hold in the late ’90s and into this decade, a new credit facility will emerge to give the special finance market liquidity.

We already have a new player in the marketplace in New York-based Sixth Gear Solutions Corp. Warburg Pincus invested $250 million and Sixth Gear raised another $750 million in debt. The folks at Warburg don’t throw large amounts of money around if they don’t smell profits and opportunity in the water. RoadLoans.com, which was the direct-lending arm of Triad, was sold to Santander Consumer USA. Their parent, Banco Santander, is a very large, very well-known and very profitable Spanish bank that happens to own Drive Financial. They’re investing in subprime not because they’re a foundation, but because they’re a corporation looking to make profits. Warburg and Santander are two great examples of smart companies that are going against the grain.

A look at the present state of the market tells us that we have more subprime customers now than ever before. Earlier this year, NADA reported that as many as three out of five auto consumers suffer from damaged credit. I think that number is high; it is, currently, probably closer to the mid-40 percent range. But I’m certain that number will grow to more than 50 percent over the next three to five 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 the economy come to a screeching halt. That will not happen!

SF: What can dealers do while they wait for more lending sources to enter the market?

JL: When we talk to dealers about how to remain profitable in this rough climate, we always stress the importance of lender relations. First and foremost, you have to 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. Second, you have to maintain the right lender mix to secure the highest possible advance and lowest fee for every deal. It also plays a major role in customer satisfaction because it helps get the best rates and terms based on the customer’s credit profile.

That means maintaining effective relationships with at least 10, and up to 20, lenders. You want to send deals to lenders with programs that cover not only the three basic credit types — good-bad credit, bad-bad credit and first-time buyers — but also those that specialize in specific credit situations such as open bankruptcy, high debt ratio, short job time and lower income.

I believe that this, too, shall pass. In the meantime, some dealers have already given up. If you can stay in the game, you can sell cars to their customers! Keep charging ahead, build a world-class special finance sales process, or find someone who can help you do it.