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Subprime's Fundamental Problem

May 2010, F&I and Showroom - Feature

by Gregory Arroyo - Also by this author

Miguel Fernandez remembers the day well. It was three years ago and two months after he had returned from a trip to Hawaii, a reward from his lender for leading his sector in funded deals over a three-month period. On that day, however, that same lender sent a rep to tell Fernandez that his dealership was being cut off because the bank was no longer doing business with independents — the first sign of things to come for his 15-year-old dealership.

“It hasn’t loosened up,” says Fernandez, whose Miami-based Tech Auto Sales store claims an “A+” rating with the Better Business Bureau. “There are players out there, but not all of them let us [independents] play in the game.”

Gus Camacho, president of Camacho Auto Sales, has read the headlines about lenders loosening up. But like Fernandez, he has yet to benefit. Five years ago, his Lancaster, Calif.-based dealer group was doing 100 special finance deals a month. Today, the dealership is only rolling 30 deals a month. The bulk of the business is now being handled by Camacho’s buy-here, pay-here operation, a business model he got serious about six years ago.

“We did it for a couple of reasons,” he says. “For one, there were fewer subprime lenders, so it was difficult to get deals done. Second, we had always done BHPH, but it was a small part of our business. Six years ago I joined a buy-here, pay-here 20 Group, and that’s when I decided we needed to do more of it.

“I guess the timing happened to be right,” he adds.

Danny Reyes, a buyer for a Florida subprime lender, has noticed a steady increase in his DealerTrack and RouteOne bills through the first quarter of the year. To Reyes, that’s a clear indication that there are more and more outside-of-prime customers walking into dealerships these days. Based on conversations with the independent dealers he works with, he has also noticed that many franchised dealers are turning away credit-challenged customers.

“A lot of these franchised dealers are used to doing the prime, captive and nonprime deals. They’re so used to that money,” he says. “Unfortunately, they’re living their days from four or five years ago.”

Dealers Still Feeling the Subprime Pinch

Despite continuing a four-month upswing in March, approvals for subprime auto loans remained at their lowest levels since CNW Research began tracking the stat in January 2002. Approvals for prime and nearprime auto loans, however, reached levels not seen since March 2008, further fueling the perception that nonprime and subprime lending hasn’t loosened up.

Through direct marketing efforts and television advertising, Camacho says his dealership has established a solid reputation for handling credit-challenged customers in California’s Antelope Valley. He says traffic isn’t down, but he’s noticed that more nonprime customers are visiting his dealership these days.

“We do see some customers who have recently become subprime,” says Camacho. “By recently, I mean within the last 24 months. And usually it’s associated with the loss of a job or a cut in pay.”

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