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Ending the Cycle

Things are looking up for the below-prime segment, but our analyst warns that there still may be trouble ahead for the finance companies and dealers who serve that segment.

August 2011, F&I and Showroom - Feature

by Jim Bass - Also by this author

Recent data points to it and the atmosphere at two recent auto finance-related conferences confirmed it: nonprime auto finance is back. But how long will it last? And how soon will the lessons learned during the credit crisis three years ago be forgotten?  

From the speaker presentations to the positive vibes flowing throughout the exhibit hall at the National Automotive Finance (NAF) Association’s Below-Prime Conference in Fort Worth, Texas, in June, the mood of the nonprime auto finance industry is as upbeat as I’ve seen in the last 15 years.

The same was true at the National Alliance of Buy Here, Pay Here Dealers (NABD) Conference in Las Vegas in May. And that’s in spite of the supply shortage of used vehicles, which has resulted in higher prices at both wholesale and retail.

Expanding Once Again

Scot Seagrave, representing Prestige Financial, said the company is looking to grow its market share by adding more dealers, not by venturing outside its preferred credit spectrum.
Scot Seagrave, representing Prestige Financial, said the company is looking to grow its market share by adding more dealers, not by venturing outside its preferred credit spectrum.

Renewed interest among institutional investors is driving the auto finance industry’s improved mood. The deep-pockets of this community is once again making their millions of dollars available to finance companies; in fact, here are three recent examples:

• In March, Prestige Financial Services Inc. completed a $222 million asset-backed securitization (ABS) transaction at a favorable funding rate and interest rate, followed by a $150 million deal with Wells Fargo Securities on a warehouse line of credit in July.

• GM Financial/AmeriCredit Corp. completed a $1 billion securitization in June at favorable interest rates and credit enhancement requirements, the third transaction the company has completed this year.

• A number of experienced management teams have successfully secured funding from investment bankers to begin new companies. Notable mentions are Flagship Acceptance Corp., led by auto finance industry veteran Michael Ritter, and CarFinance

Capital, which has four former Triad Finance Corp. execs, including founder Jim Landy, at the helm. Word is that more companies will enter the market before the end of the year.

The fact that below-prime portfolios performed well through the credit crisis and ensuing recession is, in my opinion, the driving force behind these new investments — well, that and the fact that higher yielding investments are always attractive to investors. Whatever the reason, it’s all good news for the industry. Finance companies now have the funds to purchase the paper, while dealers have more options to place that paper than they’ve had in the last two years.

However, having been around this industry for a while and observing several cycles firsthand, I’m already a bit nervous about the competitive landscape. It seems inconsistent, doesn’t it?

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