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Special Finance Lender Panel, Part 2

December 2008, F&I and Showroom - Feature

by Tariq Kamal

On Sept. 16, dealers had the opportunity to speak their minds as 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; fielded questions from the audience. The panel was moderated by subprime veteran and F&I Management & Technology and Special Finance contributor Jim Bass.

Part 1 of the discussion can be found here.

Dealer question: I’ve been financing in Southern California since 1994, and we have an unbelievable amount of foreclosures right now. How do you look at delinquent mortgage payments and foreclosures?

McKoin: That’s a good question because every score card is evolving, just like the economy. There was a time when, if a customer had a previous bankruptcy, you couldn’t get them financed. It wasn’t that long ago when that became a good credit risk for banks and lenders. And I think what we’re starting to see right now is exactly what you’re talking about.

Remember the days when your lenders told you homeowners are better than renters? It was about the stability and the ability to buy a home. When it comes to performance, that’s no longer true for a lot of portfolios. That’s a question that comes up every day in our risk committee meetings: How do we treat mortgages? Do we treat them differently from a delinquency standpoint, time-of-loan, all those things? I know they’re looking at it every day trying to figure out what’s the best decision. It’s prevalent, not just in California, not just in Florida, but in some other places that really accelerated in values.

Brock: We look at the bureau as one component. For any deal that comes through, we look at the customer, the deal, and the dealer. For the customer, one attribute is the bureau. When your portfolio is a sub-550 credit score, it is more about stability and ability than any particular line on the report.

Cope: Most of my customers are renters. I don’t think I’ve seen that many foreclosure customers cross our books. They’ll always be renters.

Dealer question: I work for a dealership in Tennessee. We do business with subprime lenders and the thing that’s changed for us is predictability. You guys are making decisions that are affecting us, and sometimes communication is not the best. We send a deal that’s approved one day and not approved the next. It goes through this cycle and we don’t know what has changed … the credit score? Type of job? We’re trying to get that deal to the right lender, but we don’t know what customer you want or don’t want. We don’t even know what has changed; we haven’t been told.

McKoin: A buyer should be able to explain to you why a deal is turned down, period. After the loan’s approved, the rate would be the second part [that’s factored in]. It’s about giving you the right rate that’s going to work for you, but that’s somewhat negotiable. That’s selling a rate and saying, “Is this going to work?” This is what the credit risk of that deal is. But if you’re having problems understanding turndowns because you feel like the same loan was approved yesterday, try to work with the buyer. Have them explain what part of the loan isn’t going for work for them.

An application is an application. From what I’ve seen on the other end, trying to put a car deal together, if they understand exactly what your challenges are and understand your pay plans, how you like your deals called back, I think we can get more in sync and some of those [turndowns] can be diminished. Typically, the largest stores that we do business with, they do understand us — and we understand them — but that’s few and far between.

Bass: I know some companies, when there’s any kind of change in the general underwriting guidelines, if it’s significantly different, will do a blast fax or e-mail. I think what I hear you saying is that sometimes these general guidelines have changed and that was simply not communicated to you. So you’re working along with customers and the first time you find out there’s a change is when it gets kicked back.

For example, up until fairly recently, what I was accustomed to seeing on a rate sheet was something like a 115 percent advance on the metal, 140 percent total, the favorite add-ons being service contract and GAP. Some of those figures may have changed. It’s not 115 and 140 anymore; now it’s 103 and 120. And, by the way, we threw in a 10 percent discount, and that wasn’t communicated to you. One thing that’s frustrating from the lender perspective is that sometimes information is sent out and we know that it went to some point of contact in the dealership, but it sits on somebody’s desk that it doesn’t need to be on. So that’s a problem, too, keeping your contact information up to date with your lenders is pretty critical. In the meantime, changes in program?

McKoin: We don’t change a ton of stuff, maybe some internal pricing. What we do change that is most obvious to all of you would be loan-to-value. Because you have an option on rate values, that would affect pricing because you could have a pretty big price swing and lower the LTV. We did one a month ago on an all-unit advance on eight-cylinder vehicles. We communicated that four different ways to the dealer through blast-fax communications, both to the decision fax and the front-end fax, and we’ll have a local number to call, a local rep to walk you through it.

Brock: As I mentioned earlier, when we look at the deal, we look at three things: The deal, the dealer and the customer. So the customer is not going to change from month to month. They’re going to be what they’re going to be. As for the dealers, we assess the portfolio of each dealer on a monthly basis. When those kinds of changes are made, it’s the individual sales rep’s job to go out and talk to the dealer about the changes. As far as the score card changing, there are minor tweaks here and there. If there’s anything significant that we’re going to do, such as shortening terms, it’s communicated through dealer bulletins or the field sales team.

Dealer question: For Scott, it seems like your company has made a lot of changes in the last few years. It seems like turndowns have started happening more often. Is your definition of subprime changing, or is this a result of changes within your organization in the last six to 12 months?

McKoin: We reorganized the company back in April, which led to significant changes in the movement between our local offices and our larger regional buying center. There was a lot of dealer movement, and personnel changed. When people say “subprime,” it is by definition whatever you think it is. … There was a small segment of the overall portfolio bookings that we had to lop off and basically say, “We cannot purchase this type of credit. We could not make it work for what we do.” In fact, we’re trying to find ways to focus on the 570 FICO mark, which is what we consider starting to move toward subprime. Anything south of 570 is where we have to be very careful.

We’re also doing a lot more verifications on our end. Making sure insurance is in place, making sure the job checks out, making sure that people live where they live, making sure the phone numbers work. So what we’re trying to do on our end is to secure a deal that is going to be profitable for the both of us. We’re not going to go by just the stated incomes or just let the deal go without any verifications.

Dealer question: What are you looking for as far as vehicles go?

McKoin: We’re constantly looking at the market. Who could have predicted that gas prices would go over $4 and the eight-cylinders would absolutely plummet at auction? I think you have to be pretty nimble in your risk assessment of vehicles. Four-cylinder vehicles, for example, were seen as higher risk because the people who were buying them probably couldn’t afford anything else. Today there are more and more overqualified buyers going into cheaper units just for the higher gas mileage. I think you’ll start to see some of that kind of movement based what’s working in the market.

Brock: We look at it from the LTV perspective, the value of the vehicle on the block. We’re going to have to resell the collateral, so if large trucks and SUVs are decreasing in value, that’s going to affect the scores in the books. Currently, we’re putting that under a high-powered microscope to see how those customers are performing under budget constraints due to gas costs. But we continue to assess the score card every month.

Cope: We like to say that we buy the customer, not the car. The car is something that the customer drives. We look at what it costs to get him to work during the week and to church on Sunday. I know what cars are worth at the auction. Our deals are booked according to the customer.

Dealer question: We were talking about how advances have tightened up. What determines that figure? Is it the customer, the relationship with the dealer or the car itself?

Brock: We don’t have a rate card, so it’s based on risk. It’s the customer first, then the deal, then the dealer.

Cope: We might be able to stretch a deal further for a dealer we’ve worked with for a long time over a dealer that we haven’t built as lengthy a relationship with. If he’s got a strong portfolio, we’ll probably stretch deals for him. That means his accounts are performing, he’s over 90 percent contractual, prompt on the paperwork — we can do a lot there. For a new dealer, we’ll stick to the guidelines and look at the customer first.

Bass: What does it take for a dealer to be important to a finance company? Where do you have to be? Is it volume, is it quality, is it — being really silly — eating the good donuts? Among all the lenders that responded to the National Automotive Finance (NAF) Association’s annual survey, how many contracts come to a lender on average from a dealer per month? And the absolutely shocking thing to me is, it’s less than two. Isn’t that amazing? I’m sure you’re sitting there thinking, “Wait a minute. I sent 12 to Citi and 10 to somebody else,” but across the board, across the nation, it’s less than two.

The lenders pretty well know how a contract from a particular dealership will perform. That prejudice used to be between franchise and independent, but as you’ve heard here today, that certainly isn’t true anymore. The borrower is of critical importance and the collateral is also important, but from a negative perspective. But if you have a bad reputation with a lender, they probably just won’t accept your application anyway.

Brock: Our average is about seven deals per dealer per month, and for us it’s quality, not quantity. We played the quantity game back in the ’90s and very few people were left standing. … It’s come full circle now, and the dealer’s portfolio and the lender’s portfolio have to perform to get access to the capital markets. So if you’re looking to see which way it is, it’s going to be quality and not quantity.

Cope: Because of the paper we buy, the quality is very important. Our relationships with our dealers go back many years. I’ll buy just one deal a month from a lot of them, but I have maybe four or five dealers that give me over $100,000 in volume per month. I have 15 branches out there and they’re all buying paper from one end of the country to the other, and the relationships my branch managers have with their dealers go back many years. The better the relationship with the dealer, the better the performance of the paper, the more deals get bought.

Bass: Another trend that’s been going on over the last three or four years has been a gradual lengthening of terms, even for the subprime market. I think what was driving that was two things: One was the price of what people were buying, the other was to be competitive with each other. The lenders were trying to figure a way to give higher and higher advances. Well, of course, the payments went up and out of affordability range. Back in the ’90s, the absolute maximum term was 48 months. It’s now crept up and the average is probably closer to 60 months, and there was a lot of talk before this mortgage thing about how it’s creeping toward 72 months even on cars that had 60,000 to 70,000 miles on them. Is that continuing? How are you all treating term now?

McKoin: We don’t have any plans to change the terms we have today, which is 72 months on any car you would retail. Not a factor for us.

Brock: Our max term is 57 months. On average, it comes in the books on a monthly base of about 43 or 44.

Cope: I’m a short-term guy. Most of my papers are 36 months. I’m financing between $5,000 and $10,000, and that’s a $250 per month payment.

Bass: What is your average amount financed?

Brock: The average contract is probably $13,000.

Cope: $7,800 to $7,900.

McKoin: $19,000.

Bass: So there’s quite a variety here. You can tell by the collateral how customers are finding their way into deals with each of these lenders.

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