With finance sources pushing more consumers toward the used-vehicle market and subprime consumers being virtually locked out from auto lending, the buy-here, pay-here model is definitely a top-of-mind topic these days. This month, the magazine brings together Stan Schwarz, founder and CEO of PassTime USA; John Marlin, regional sales lead at FinCo Management; Dwight Cope, president of Western Funding Inc.; and Michael Sheridan, president/CEO of Global Debt Network, to discuss what is becoming an attractive option for dealers.
SF: Earlier this year, the BHPH approach was heralded as a way for dealers to weather the tightened credit market. Is that still the case?
SS: Absolutely, the love for the automobile is not going away; it is just evolving. Dealers will use this opportunity to become more involved in the sale of used cars, which we think will expand the BHPH space. In addition, dealers are in the best position to leverage their existing staff and facilities to enter this space.
MS: We believe that the BHPH model is one of the few models that has weathered the tight credit market, and we think it will continue to thrive. However, both new and existing BHPH programs need to be carefully constructed to generate the returns the dealer is seeking, as well as meet the demands of potential buyers of these portfolios. Dealers need to be aware that portfolio buyers require more compliance and institutional practices, such as standard underwriting criteria and pulled credit bureaus on every deal.
JM: BHPH, or BHPThere, as we call it, is a great way for a dealer to take control in a tight credit market. Lenders are delivering fewer approvals, higher discounts and forcing dealers to take smaller margins due to advance restrictions. These challenges do not exist in a BHPH model. Through BHPH a dealer can do the deals that make sense without facing restrictions on what vehicles can be financed, or limits on their profit potential.
DC: The BHPH model is still a viable option, provided that the dealer has sufficient cash to sustain such an operation. A dealer can move inventory, but he also needs capital to replace that inventory, operate his business, or pay flooring costs.
SF: I heard that “payment stream” or “payment strip” programs were the talk of the show at the National Alliance of Buy Here, Pay Here conference back in May. I’m guessing the current appetite of investors for these types of portfolios is what drove those discussions?
DC: Payment stream/strip programs have been around for years, as they were primarily used by BHPH dealers to raise funds to replace inventory. And like you said, I feel these programs have now grown in popularity due to the lack of interested investors and the shrinking availability of credit in these turbulent times.
SF: What are some other viable BHPH models for dealers?
DC: In addition to the payment stream/strip programs, the outright selling of receivables also serves the BHPH dealer, especially when you need to generate a large sum of money. Selling paper (point-of-sale) at some sort of discount also enables a dealer to recoup his expense, garner a small to moderate profit, and replace the sold unit on his lot.
SF: Now Mike, you launched your loan portfolio transaction platform last June. Can you give us an update on adoption, as far as dealers and portfolio buyers?
MS: We have had a tremendous response from the market for our product, but the road has not been easy. Immediately after launching, the entire portfolio purchasing world collapsed, which made it difficult, if not impossible, for dealers to get their portfolios sold on our system. We now have more than 200 sellers, with about half of them auto dealerships. We also have 230 buyers on our platform who are looking at a different portfolio quality, performance and size.
SF: What type of activity are you seeing on your platform?
MS: We have seen some activity in May and June with portfolio pricing increasing slightly and the overall number of bids increasing as well. We have seen transactions between 60 and 85 cents, with two months recourse being the standard. Often, dealers may not be ready to sell at 60 or 65 cents for their portfolios, but at least they are learning what buyers are willing to pay. Dealers are also learning the requirements buyers need to make a purchasing decision. This will help them structure better deals at origination.
SF: John, the July press release on your company’s BuyHere-PayThere program received a lot of attention on our Website. Can you give us a quick rundown of the details?
JM: FinCo provides everything needed for a legally compliant dealer finance program. Via the FinCo Website, the customer’s credit is analyzed in seconds and contracts are prepared online. FinCo books the loan and performs all servicing, collections, repossessions and remarketing if necessary. The dealer receives the principal portion of the customer’s monthly payment. There is also no sign-up fee, no minimums and no long-term commitments.
SF: Your program is only available in 30 states, correct? Are there any legal issues preventing your program from expanding into other states?
JM: Correct, FinCo is authorized and/or licensed in 30 states, including Florida, Texas, Illinois, and California. We cover 71 percent of the U.S. population. As volume builds, we will apply for licenses in the other 20 states. In remaining states, we see no laws precluding BHPThere services other than issues stemming from the creditor’s right to self-help. In these states, a court order may be required to repossess. In that case, FinCo will obtain the order.
SF: Stan, as you know, we’re beating the BHPH drum this month, and any discussion on that topic has to include payment assurance devices.
SS: These devices definitely play a huge role in the BHPH approach. However, I want to put to rest the belief that these devices act as a substitute for good underwriting practices. They absolutely do not. They are simply designed to remind customers to make their payments in a timely manner, which in turn reduces collections costs for lenders.
SF: Hopefully, the Payment Assurance Technology Association you helped found with several of your competitors will clarify misconceptions like the one you just mentioned. Can you talk about the impetus behind this association, as well as your goals?
SS: As you know, PassTime has a very broad base of both lenders and dealers. Through our communications with both segments, it was becoming increasingly obvious that there was a need for a set of standards, which is why we believed the PATA was the next logical step. So right now we’re working toward establishing a set of standards for dealers and finance companies to use as a benchmark. We believe it’s important that these standards be transparent to ensure that suppliers, lenders and customers understand the value of these devices to their operations.