Consolidation of Nonprime Finance Companies and the Affect on the Market

In discussions with various finance company executives with whom I have the good fortune to be acquainted, it is interesting to hear their opinions on a number of subjects. One such subject has to do with competition among the finance programs currently in the market. ALL of the companies watch the competitors and have methods of getting everyone’s program guidelines (primarily from auto dealers) to evaluate and determine whether someone else has figured out how to get the “good” business.

The usual result of that sort of deliberation is either “Our program is better than theirs,” or, “Are they out of their ever-loving minds?” Frankly, I’m not sure anything ever comes out of these competitor comparison changes, because each company feels it has the best score card, underwriting rules, etc. It also takes a relatively long period of time for score cards to change because the changes are based upon new portfolio data since the last score card was implemented. So, the marketing staff pulls its hair out from frustration while the perception continues that the competition is getting too much business, hamstringing the company’s sales force.

Changes do occur, but they do so over time, not instantaneously. Now consider that the bulk of nonprime paper today is being bought by very large companies, or at least finance companies that are owned by very large companies. Many times, these large companies happen to be banks. CitiFinancial Auto acquired Auto One, TranSouth, and Arcadia; WFS is now owned by Wachovia; Wells Fargo ended up with Pro-Credit and Franklin Acceptance; Chase now owns Bank One Special Finance (previously known as Valley Nation Bank’s program out of Phoenix); Capital One owns what was Summit Acceptance, which now operates as Hibernia Bank. The list goes on and will continue to grow, which means, effectively, there are fewer companies out there competing for the dealer’s business. There has been a net shrinkage of brands, translating into fewer choices for dealers.

And, of course, we cannot overlook AmeriCredit. It has managed to stay independent (publicly held), while still purchasing a large percentage of each month’s finance contracts. Others taking the lion’s share of finance contracts include First Investors Financial Services (also publicly held), Triad Financial and a few others. If you add up the finance contract purchases of the large companies, it is a substantial percentage of the nonprime business — outside of the buy-here, pay-here segment.

So, should we be alerting the Justice Department that anti-trust action is needed? Hardly, as the market still has many players. The problem is we have many players going after the same business; roughly defined as FICO scores from 560 to 680 (and higher). So, how does this affect your dealership? Well, that’s a very broad question to answer. Instead, I’ve prepared some Q&As (see sidebar below) to address the questions you should be asking, or, hopefully, you are already thinking about.