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Special Finance Lender Panel, Part 1

November 2008, F&I and Showroom - Feature

by Tariq Kamal

An esteemed panel composed of Jeffrey Brock, vice president, ancillary products at Credit Acceptance Corp.; Dwight Cope, president of Western Funding Inc.; and Scott McKoin, managing director of sales for CitiFinancial Auto; met with dealers at the 2008 F&I and Special Finance Conference & Expo on Sept. 16. One day earlier, global financial services firm Lehman Brothers filed for Chapter 11 bankruptcy after having suffered enormous losses as a result of the subprime mortgage crisis. The panel was moderated by subprime veteran and F&I Management & Technology and Special Finance contributor Jim Bass.

Part 2 of the discussion can be found here.

Bass: This is a very interesting time, and if we didn’t think it was interesting enough, we just found out about the extent of the problems at Lehman Brothers. That really exacerbates the largest problem facing the industry, which is liquidity, and it’s going to be interesting to see how that shakes out. I’d like to first ask each of the panelists to just spend a few minutes talking about their take on what’s happening now, and anything specific that’s going on with their company — good, bad or indifferent — to help out subprime customers and the dealerships. Scott, we’re going to start with you.

McKoin: Good afternoon, everybody. I run the sales division for CitiFinancial Auto, and I think it was about October of last year that things started getting a little bit “different” in the auto finance arena, and for sales as well. I think the mortgage meltdown started the crash in the market today, which for dealers is coupled with the crash you see in the auction prices.

I can tell you that over the years, we were growing by 30 or 40 percent per year. We were basically working with any dealer who would send us an opportunity or an application. The approach we have taken over the last six months, and will continue to take, is to emphasize that it’s more important today than ever to have a real relationship with our dealers, not one in which you look at a bunch of apps and occasionally buy one or approve one. We want to really understand each dealer, the challenges they’re facing and the goals they’ve set for themselves.

We want to identify dealers with whom we can say, ‘We like what you do, you can help us put car deals together, we understand one another and we treat it as a true relationship.’ Some of the economists were saying it was going to get better in the second half of 2008. Well, we can see where we’re at now. I don’t know exactly what’s going to happen with the economy, I’m not that smart, but I do know that, going forward, lenders and dealers have to work closely together to help get deals done.

Cope: I’m with Western Funding and we’re a special finance company. Times are great for us. The secondary lenders are tightening up, which is leaving a lot more business for us. We build relationships with our dealers. I have dealers who have been with us for over 25 years. We don’t advance as much as everyone else. We buy the customer more than we buy the car.

Brock: I’m with Credit Acceptance and I’ve been there for about 13 years now. I was around in the mid-’90s, when we had a lot of irrational pricing for the deep subprime paper. We were one of the first to go public. We saw a lot of competition come in after the fact, not too dissimilar to what we’ve seen in the mortgage industry ... It was good money chasing bad.

We were lucky enough to be conservatively run then, and we weathered the storm. Our field sales team would say, ‘We’re not paying enough, we’re not paying enough!’ And the CEOs would continue to reiterate that the pricing model says we are pricing the right amount; we are not going to do irrational things because money’s cheap. And I think that, to coin a phrase, the chickens have come home to roost. I think what you’re seeing now is that there were a lot of irrational things, particularly in the mortgage industry, that caused the housing crisis, which in turn caused the banking and credit crises. I think our conservative approach has put us in a good position to get money and continue to grow.

Bass: As you all know, Triad and HSBC and a few others have completely ceased originations. We also have seen across-the-board cuts to originations by 50 and 60 percent, so it’s painful out there in the dealer world. What are the conditions under which origination volume would change? What can we do to help these dealers, Scott?

McKoin: We’re trying to find dealers who really want to do business with us and vice versa. That’s better than just throwing reps into a bank and see if maybe they’ll buy it and us repping a dealer like a traditional bank rep. We’re asking our salespeople to spend more time with fewer dealers in order to really get to know people. We need to know everything about that dealership, how they operate, how their sales system works, how their pay plans work. So find that lender and really try to work with them the best you can. The days of “throwing and going” for both banks and dealerships are long gone.

Bass: Some cynics, or maybe realists, have suggested that dealers may no longer be in the driver’s seat. What do you suppose they mean by that statement, and how does that affect the lender-dealer relationship, Jeff?

Brock: When it was throw and go, you used to be able to call the buyer, look for exceptions, bend the rules a bit. The scorecard is in evolution, and sticking to the rigid guidelines is what’s going to get you to the next level. By building a relationship with each lender, you sow the seeds now and reap the rewards later. The times will change and there will be money available.

Bass: As the subprime mortgage crisis kept getting worse and worse, I didn’t assume any correlation between subprime mortgage paper and subprime auto. And yet it’s reached the point where if its subprime anything, it’s a term that scares away the liquidity providers. Back in the ’90s, what really made subprime auto get going again was asset-backed securitization. That market is not too good right now because the mainline guarantor insurance companies have lost a lot of credibility. Has anybody heard of any new or innovative ways to fund this industry?

McKoin: We don’t securitize so we don’t have to go through that process. That’s a very challenged market right now. Liquidity and marketplace and the capital that’s available now is very tight in general. I’d like to know from the dealers who are here, what has changed over the last year that they need help with? What are you looking for here today that lenders aren’t fulfilling? What do you need from a lender when you get a customer you’re closing? What piece of the market is going away for availability for financing? I’d like to hear that.

Dealer question: I work for a high-end dealership, and our customers’ needs have changed. Would your banks consider subprime leasing?

Brock: We tried subprime leasing once before. Trying to assess the residual value on a used vehicle going into a transaction with a subprime customer wasn’t very profitable. As for payments, there’s not much you can do other than stretch the terms, and stretched terms often lead to more delinquencies.

Cope: We tried leasing about 15 or 20 years ago. Our customers don’t understand leasing; they understand buying. We switched to a fixed-value program, a balloon payment-type program. We can lower the payment to $25 and $50 a month and keep the balloon between 10 percent and 20 percent so the customer can afford to make payments. And heaven forbid they actually buy the car. I expect the dealer to trade them into another car after two or three years.

Bass: I think that when the lenders tried subprime leasing a few years ago, the captives started offering some subvented leasing programs using pretty understated residuals. That made it so we weren’t able to compete, at least on a payment basis. We weren’t able the reach out to the manufacturers to help us out on our rates and absorb those losses. Had independent companies been holding that paper and depending on market rates for money, it would have been a big blow, in my opinion.

Click here for Part 2.

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