On March 20, Wachovia Dealer Services will officially become Wells Fargo Dealer Services. Founded as an independent lending company by Westcorp in 1973, the auto finance unit was inherited by Wells Fargo when it purchased Wachovia in December 2008. As it stands on the verge of its fifth name change, few could blame the auto finance unit if it were to suffer from an identity crisis. As it turns out, the opposite is true.
Last year, Wachovia Dealers Services held the highest market share for used-vehicle loan originations. It was listed No. 1 on Experian Automotive’s list of top subprime auto lenders. The company also helped lead the drive to rebuild the floorplan financing market and was instrumental in bringing liquidity to the marketplace by securitizing loan portfolios — even those originated by its competitors.
Company executives will work to add to the record of success for the company that went from an independent lender under Westcorp to Western Consumer Service Corp. in 1988, then to WFS Financial in 1990, and to Wachovia in September 2005. Wells Fargo completed its purchase of the company on Dec. 31, 2008.
Leading the charge for the new Wells Fargo Dealer Services group is Tom Wolfe. He is no stranger to change, having first joined WFS Financial in 1998. He was named chief executive in 2000 and was picked to head the auto finance unit when it was purchased by Wachovia before being named chief executive in 2000.
Joining Wolfe are some familiar faces, including Jerry Bowen, the former exec of Wachovia’s commercial lending business, and Bill Katafias, who served as Wolfe’s national production manager of the indirect lending unit from their days at WFS Financial. The three lending pros sat down with F&I’s Gregory Arroyo at the recent National Automobile Dealers Association Convention & Expo in Orlando to talk about what the name change means.
F&I: It’s obvious by your business unit’s activity last year that not much has changed since it was purchased by Wells Fargo. And I think it was you, Tom, who said at our conference last year that Wells Fargo was adopting the indirect and commercial financing model you headed up at Wachovia. Can you talk about what the combination of Wells Fargo and Wachovia means to dealers?
Wolfe: Just think about it in terms of the different platforms we have. There’s the old WFS platform, then we enhanced our offering with prime lending when we merged with Wachovia. Wachovia also had a commercial book of business that Jerry ran, which has now been combined with Wells Fargo’s commercial book of business. So Jerry now runs a nationwide commercial book of business. We also have GE Warranty – Warranty Services, which we added a couple of years ago to round out our offering. That line of business operates today as Warranty Solutions.
Wells Fargo also has a business called Strategic Auto Investments, where we create private securitizations, which allows us to create liquidity in the marketplace. So, if you look at our commitment to the industry — we support the commercial side, the indirect side, dealers through aftermarket products, and then we buy loans from other lenders to keep liquidity in the marketplace — you can see that we’re probably one of most vested companies in the auto finance industry.
F&I: From what I understand, much of the integration of Wachovia into Wells Fargo has taken place behind the scenes. But with the name change being one of the more visible steps, is there anything you’re doing specifically to commemorate Wachovia’s official integration into Wachovia?
Wolfe: We have been communicating with our dealers to let them know what is coming. A lot of our communications with the dealer community has been handled by our internal sales force. Our dealer is our customer, so between Bill’s more than 200 sales reps and Jerry’s own team of sales reps, we’ve been in constant communication with dealers so they understand what is ahead. As for the end-borrower, since we just went through a name change from WFS Financial to Wachovia, we have a pretty good road map on how to get that done with minimal impact to our borrowers.
F&I: Tom, I’ve heard you describe your company’s business practices before. From what I recall, the automated systems you employ are used for the higher credit tiers, but you run the business like a community bank for all tiers outside of prime. Can you talk about that?
Wolfe: We automate the very top end of the credit, but we move to judgmental lending quicker than most because our teams are in the local markets and know our dealers. We give our people the tools and information needed, but we really rely on our people on the ground to make the right credit decisions for their market. All of that comes down to the fact that we understand there are things going on in different markets today that require quick adjustments, which people can do better than scorecards.
Just look at the used-car values. They’re constantly changing, so we need to make sure we’re adjusting as well. Also, a scorecard can’t be adjusted fast enough to take into account the changes going on in the economy, which is why we encourage our people to look at what might be going on with that consumer and in their market. All of those things, we think, make us a smart lender.
F&I: Bill, I’ve heard you guys describe your indirect lending business as a transportation lender. Can you talk about that?
Katafias: We basically position ourselves as putting Main Street America in vehicles they need to get to and from their jobs. These are customers who have deleveraged themselves and are becoming accustomed to working with a debt structure that meets their current income levels. That trend really aligns well with us, as it has really helped us grow in this market.
F&I: Experian Automotive listed you as the No. 1 subprime auto lender for 2009. Can you talk about that?
Wolfe: First off, I think the list provided a very broad definition of what subprime auto is. I think it started in the 500 FICOs and went up to as a high as 680. However, I think the reason we were listed so high is because we stayed committed to the business throughout 2009. And while others, because of capital constraints or other portfolio issues, were forced to withdraw from the market, our consistency in the marketplace had us gaining market share all year long while our total volume in this sector actually decreased. The truth is we didn’t do anything different last year. We just stayed active. Another reason for our gain in market share is that a number of subprime and nonprime lenders simply left the market.
F&I: Jim Bass, a regular contributor to the magazine, talked about how the performance of auto loan portfolios remained strong last year despite the recession. So why was there such a dramatic pullback by lenders when it’s obvious auto finance wasn’t the problem?
Wolfe: Well, severity was an issue for all lenders at the end of 2008, because used-car values dropped so significantly. You had the gas price issue, you had the customer preference issue, and then you had the economy, and all of that was happening at the same time. So, all of a sudden you’re seeing loss-per-unit numbers that you’ve never seen before. In addition, you had trucks no dealer wanted to buy, so you were trying to decide, ‘What is my origination strategy and how am I going to manage risk?’ Then it bounced back pretty quickly in ’09 and got better and better, driven by the capacity issues for GM and Chrysler and fewer cars being built overall. So, all of a sudden, we’re in balance again, and those risks disappeared pretty quickly. Now, how lenders reacted to that may have been different. We saw it as a blip, and said, ‘OK, we’re back into what we can really understand and manage.’ But there were some pretty dark days for a lot of lenders.
F&I: Will you continue to pursue the subprime segment?
Wolfe: We buy a broad spectrum of credit. Our goal is to identify the credit and customers who are moving up or have stability in their marketplace. So, if I was meeting with one of my credit analysts in Buffalo, N.Y., and the data for a customer shows high stability on the job and in the residence. The customer grew up there, has the right down payment, and is using the car to go back and forth to work, I would tell them to buy it. Now, you may have to price that differently, and you may have to identify how we’re going to validate some of that data, but we’re not going to pass on a good piece of credit because of their FICO score. The fact is we don’t rely solely on FICO scores, as we have our own method for analyzing risk.
F&I: You sound a lot like a community lender to me.
Wolfe: We do view ourselves as a community lender, which is well aligned with Wells Fargo.
F&I: Let’s talk about floorplanning. I understand that your team has been very active — not only in the market, but in helping with the NADA’s efforts to restore floorplan financing through the Small Business Administration. Can you talk about your efforts so far?
Bowen: We’re meeting with the SBA this weekend to talk a little bit more about where the program stands today. When the SBA program was first launched in July 2009, there seemed to be demand in the marketplace for floorplaning, a lot of that driven by captives having to pull back and some of the dislocation that really impacted GM and Chrysler.
Now, the intent was where it needed to be when the SBA program was initially launched. The objective was to help provide capital to a marketplace where there is pretty strong demand. However, some challenges arose from the initial phases of the program for the auto industry. Some of the banking lenders that were interested may not have had systems in place to manage the business, or they didn’t have the underwriting expertise. They had capital, but they didn’t understand the floorplan business. And for those that did, they may not have had the systems in place. So there was a little dislocation as it relates to aligning to the needs of the dealer community.
And frankly, the parameters of the SBA program didn’t fit the needs of floorplan financing. The window for support was between $500,000 and $2 million, but the NADA will tell you the average floorplan lies between $4.9 million and $5 million. So, out of the gate, there’s a little bit of a mismatch.
So, we’ve been having conversations with the SBA and the NADA to kind of revisit the program to see if there is a solution that makes sense and that fits better — not only for the dealer market, but for the lenders interested in participating in the program. Since those initial conversations took place, however, it seems that some of the noise out in the market about floorplanning not being available has died down. So, we’re still trying to find out exactly how you size and quantify what the demand is out there.
F&I: I know you stayed consistent with the indirect lending side of the business, but what about the commercial side?
Bowen: We grew our floorplan relationships during the course of 2009. We were able to continue to support clients we had before the market went crazy, as well as new clients we picked up during the downturn. What we did see was that there was less utilization of floorplan facilities, as dealers came to understand that they didn’t need as much inventory. Cash for Clunkers sold down a lot of that inventory as well and some of the domestic factories shut down for the summer, so there wasn’t as much inventory to finance. But we’re starting to see that build back up.
F&I: Now, am I correct in saying that you are combining the Wells Fargo and Wachovia commercial business?
Bowen: Yes, that’s right. If you look at the Wachovia commercial business, it was predominantly East Coast, a little bit in Texas, and a small presence in the West. Wells Fargo, on the other hand, was almost the exact opposite, primarily doing business west of the Mississippi. So, actually, it’s a very good fit, as it now gives us a national commercial platform. We also are very similar in the way we approach the business, the way we align ourselves from an organizational standpoint and how we support the dealer community under the dealer services umbrella.