Capital One Puts Dealers in the Driver’s Seat

Q: Capital One has definitely been on the move since entering the subprime automotive finance market in 1998. With all the mergers and acquisitions that occurred in the last couple of years, I was wondering if you could recap for our readers what Capital One has been up to?

A: As you said, our purchase of Summit in ’98 was our first entry into the business, but we’ve grown substantially since then. I think we’ve made some great organic growth, but we also brought PeopleFirst.com into the family in 2001. In the last few years, we added Onyx Acceptance Corp, Key Bank, part of their portfolio, as well as Hibernia National Bank and North Fork Bank in 2006.

Q: You’ve certainly been busy. Do you expect more merger-and-acquisition activity this year?

A: Our real focus this year is making our new program, which we’re rolling out nationally this month, successful. Basically, we’ll be providing our 18,000 franchise and independent dealers with a true full-credit spectrum financing program, one that will address 500 FICO scores and up. So that’s what’s got 100 percent of my attention these days.

Q: You definitely seem to be one of the frontrunners in this full-spectrum trend. In fact, in a March market report, Standard & Poor’s listed Capital One as being at the center of this trend. For our readers, with everyone touting full spectrum, what will be the differentiator?

A: I think the differentiator, and what I think dealers will find if they give us a try on a full spectrum basis, is that they will see that we are buying across the credit spectrum. We will buy the 500 paper. We’ll buy paper up at the top of the FICO range, too. And we’ll do it with competitive offers. And I think that’s the real test of whether someone has gone full spectrum — what kind of offers they can make to dealers across the full credit spectrum to help them meet their needs.

Q: Going back to your new program, One Program, can you tell our readers a little more about your plans?

A: With the acquisitions we’ve made in the last couple of years, this new venture is aimed at integrating the best of each company. That’s going to mean buying full-credit spectrum in a serious way. It’s going to mean moving to dedicated dealer relationships, where both field and internal resources will be focused on individual dealers so they have a specific person to work with across the whole credit spectrum.

The main thrust is getting the fastest turnaround possible on approvals, funding and all the other things that dealers really care about. The program was available for a large section of the country until June 18, which is when we rolled it out nationally. By the time dealers read this interview, they should have been hearing from our field reps as to what’s changed.

Q: Does this rollout include the opening of new offices in new regions for Capital One?

A: We are doing that, but we’re really doing two things here. First, we are leveraging the acquisitions we’ve made, as well as expanding into new regions across the country. We’re doing that through buying centers, which is where we’ll have dedicated staff to address dealer needs. For example, we’re going to have a buying center in Foothill Ranch, Calif., where Onyx was. We’ll have a satellite office in Baton Rouge, La., where Hibernia was. We’ll be using North Fork’s location in the New York state as our Northeast buying center. We’re going to have 10 different places across the company basically staffed up to support dealers directly.

Q: So this is the final step to being full spectrum?

A: Yeah, this is the first time we’re bringing it all together, and moving to a full-spectrum financing approach. And we think we have what it takes to back it up. And that doesn’t mean we’re not going keep getting better. What we’re doing is kind of a nice way for us to bring everything together from the acquisitions that we’ve made and from the initiatives we wanted to bring into the market.

Q: Looking at your most recent quarterly report, going full spectrum has definitely paid off. Your auto finance business continues to deliver profits and grow originations due to your full spectrum strategy.

A: Overall, we’ve been really happy with the growth we’ve seen across the spectrum. And, as you pointed out, our results at the end of March had our portfolio up to about $24 billion. And that’s based off of the $10 billion we reported in 2004. So we’ve experienced some nice growth, and we’re feeling pretty good about how each of our segments is doing. What’s really attractive to me is that we’ve achieved this growth without having an integrated program like the one we’re pushing forward now. So, if we’ve been able to achieve what we’ve done with all these pieces of the puzzle, I’m really excited to see what happens now that all the pieces have come together. We’ve been trialing this program for about seven or eight months here in Texas and Oklahoma, and we’re quite pleased with the results. We think we’re going to have a good program here nationally.

Q: I’ve heard from other industry insiders that the true test of going full spectrum will be the mid-prime, or nonprime segment. What’s your take?

A: The way to really test someone’s full spectrum ability is to see where they really buy. One of the things I’m really excited about with our full spectrum program, and our history as a player in that part in the market, is that dealers will find that we will continue to be a strong player in the nonprime area, just as we continue to be very competitive in prime. And, with our history in the nonprime area, we’re very well set up to succeed there. And the things we’re doing to expand into prime can only help us move forward.

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Q: I wanted to get your take on the subprime mortgage industry. Since the news broke on that market, many analysts have said the automotive finance industry has put in place several controls to prevent something similar from happening. And obviously, those two markets operate somewhat differently. Still, I have to believe the news about the subprime mortgage industry acted as a wakeup call. What was Capital One’s reaction?

A: That is a great question. Our CEO Rich Fairbanks spent a lot of time in the last conference call with the media talking about subprime mortgage overall. We have very strong results both in terms of originations and in terms of our credit results, and nothing happening out there in any other industry is changing what we’re trying to do.

Q: The automotive industry in general is facing some pretty difficult challenges. There was good news in May regarding vehicles sales, but predictions that 2008 will be the year of the used car persist. What’s your take?

A: I think the auto industry has got the exact challenge you mentioned. Another way that you can think about the test for full spectrum is actually what you just talked about, which is — as dealers will find with our full credit spectrum program — we tend to be a very strong buyer of used cars. We still keep our eye on new-car sales, but robust used-car sales are an attractive part of the market that we play in a lot, and it is a place again where full-credit spectrum can really help a company out.

Q: With sales declining, F&I has definitely been a major focus in the first quarter of 2007. However, some F&I managers are definitely feeling the pressure to get deals done. They know if they can’t, someone else will — whether that’s a neighboring dealership or the Internet. What are you talking to dealerships about these days?

A: I think I spend more time listening than talking when I meet with dealers. However, most of my conversations have centered on our new program. From those conversations, I get the sense that there’s a need among dealers for an easy-to-use, one-application, full-credit spectrum program.

Q: Now, I wanted to quiz you on the recent CBA study. It showed a slight growth in lending as consumers stretched out payments to record lengths. Obviously, that monthly payment has been a closer for many consumers. What’s your take?

A: I would say in our program we tend to be more on the conservative side when it comes to terms. We found that we can make really competitive full spectrum offers for folks without having to resort to expanding our terms in almost all of the cases. One of the things we’ve seen with our (One Program) pilot program was that dealerships have really found our dedicated manager relationships very helpful, because they have the flexibility to make some changes. And if they need to change a term to make it work for the right kind of customer, we absolutely have the flexibility to do that, but this is a new example of something in our dedicated dealer relationships that I’m excited about for dealers.

Q: The CBA study also pointed out that the average new vehicle loan size increased 4 percent, as did the average amount finance, which the study said was 95 percent of invoice, or 90 percent of MSRP. I’ve heard the comment that we are now in a credit-dependent economy, and these stats are certainly pointing that way. What’s your feeling?

A: In my past life I used to be an economist, and you know what they say about economists … they only have two hands, on the other hand, on the other hand. I think the economy is changing. I think if you go back ten years, you see the exact same stories of people becoming a credit-dependent economy, consumer debts rising. So these stories always exist. The great thing about Capital One, as a company and as a player in the automotive finance business, is our information-based strategy approach. We are all about finding the best risk and making sure we do the right thing from a customer-risk standpoint. We think we do quite well even when the industry is changing, and we’ve had a good history of results that tend to bear that out. So we want to make sure that no matter what’s happening with consumers that we have a full credit spectrum program that meets the dealers’ needs for that. Consumers are going to evolve how they’re going to evolve, but we want to make sure that our program is there for dealers no matter how that happens.

Q: I know everyone was keeping a close watch on how delinquencies would look in CBA full study. The preliminary study showed a slight uptick, but the final study showed that delinquencies have continued their four-year decline. I guess some fears were put to bed with those results, but this is obviously something the industry will continue to watch. What’s your take?

A: We always keep a close eye on that, but, again, we’re a strong player. We think across the whole credit spectrum. And we’re excited to grow across the whole credit spectrum. So far, nothing I’ve seen in the market dissuades me from wanting to do that.

Q: Credit quality has also decreased slightly this year compared to a year earlier, the study showed (716 vs. 722). It’s not a big decline, but what’s your reaction?

A: I don’t see that as a significant drop, but, more importantly, I actually see that as a big opportunity for us. You know we have an immense opportunity in the prime area just because a lot of our history is in the subprime area. So, with the new full-spectrum program that’s targeting that part of the world, that’s just a great opportunity for our full credit spectrum program.

Q: I wanted to ask you about e-contracting. Obviously, the acquisition of PeopleFirst puts you in a good position to take that on. However, can you tell our readers where you’re at with e-contracting?

A: We are e-contract-enabled in all 48 continental states. And we think it’s good for dealers, and we think it’s good for us. Anything that can make things more effective for both sides is a win for everyone, and we are fully enabled for that with this new program.

Q: So, when do you think e-contracting will make a significant impact on the business?

A: I don’t have a crystal ball, but we’re ready now to work with dealers. We think that it’s also part of our full-spectrum program. So, if that’s something that makes dealers’ lives easier and they want it, we want to be there and have it for them.