How big is the gap between dealers and lenders when it comes to special finance?

Big enough to drive a car through.

Rapidly changing technology and market conditions combined with increased industry consolidation have widened the chasm between dealers and lenders when it comes to credit-challenged customers. This presents a serious dilemma -- particularly as credit scores continue to turn south. For the 12 months ended Sept. 30, 2003, personal bankruptcy filings jumped a record-setting 7.8 percent to 1,625,813, according to the Administrative Office of the U.S. Courts.

However, there is good news on the horizon. The principals recognize the issues that divide them and are taking strides to reduce -- if not remove -- them.

Technology Impacts Relations

"Lender consistency" is currently absent in the market, says Jim Jenkins, southwest regional manager for Bar None. Based in Silicon Valley, Calif., Bar None is an auto finance company that provides subprime consumer leads to dealerships.

"When I learned subprime so many years ago, I was taught to read credit and lender guidelines and make loan decisions on the spot for lenders using their own credit guidelines," says Jenkins. "I used that process until I exited retail in 2001 and it never let me down."

Today, Jenkins says, online finance platforms take the decision-making process away from underwriters by sending deals directly into a computer scorecard. This has impacted the personal relationship between dealers and lenders.

Very few of the 39 dealers Jenkins works with throughout California are allowed to spot deliver a car. "They'll all tell you they can, but when it comes down to it, they take an application even before they've met the customer -- even before they've seen stips -- and they'll input it directly into DealerTrack and get a loan decision," he says.

And it's nearly impossible to revive a deal that's turned down, he says, even if subsequent information is presented.

Gannesh Bharadhwaj, group director, product management for Household Automotive Finance, agrees that decline overrides are few and far between.

"There's a lot of historical data in terms of past performance that we can leverage against," says Bharadhwaj. "We're getting most of the information upfront to make that decision. I think DealerTrack helps with that because it gives the dealership an easy way to get that information to us so we can then pull up the bureau and make a decision."

Good Relationships Matter

Bharadhwaj says Household does still balance automated and manual decision-making. A good percentage of applications is sent to a credit officer to evaluate before the decision is relayed to the dealer. A Household portfolio management team member calls the dealer back on every deal to discuss how to structure it and make it work.

Personal relationships between dealers and lenders -- an essential component of the subprime practice in years past -- help bridge the gap. It has been the success formula for Juan Padilla, finance director of Orange Empire Auto Sales. Although his dealership averages just 90 to 105 units a month, Padilla specialized in subprime finance at several large dealerships throughout Southern California.

"I've gotten people with scores in the 490s and 480s bought at Fireside and WFS; people don't believe it," he says. "But if you have a good rapport with them, get everything up front and give reasons why, the finance guy's going to make a point or two for the dealership, and make more money for himself."

Working Around the Problem

Poor-credit consumers who are hard-pressed to get financed have created the need for "buy here, pay here" stores. These dealerships double as lenders and effectively eliminate the gap.

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One of the most successful is Phoenix-based DriveTime, which services credit-impaired people in eight states and 11 metro areas with 76 dealerships. Because it also serves as the bank, DriveTime can provide more flexible financing options than other dealerships.

"We are first and foremost a financing company," says Alex Litke, a DriveTime sales manager based in Costa Mesa, Calif. "We don't have to sell the loans to someone else. We don't have to try to qualify you or prequalify you."

As a finance company, DriveTime does risk losing a lot of money by doing special finance, says Litke. But, by providing the customer with good service and support and by staying in contact with them, the company can be more profitable, he says.

Being an Underwriting Expert

Education is another means to narrowing the gap.

"One of the best ways for an F&I manager to bridge the gap between lenders and the dealer is to completely understand lenders' loan underwriting processes and guidelines," says Eric Andersen, president of the College of Automotive Management.

"Some lenders let their underwriters make underwriting decisions based on credit, ability to pay, stability and equity," explains Andersen, a former special finance manager. "Other finance companies have a computer scoring system that makes the decision; if the loan fits into the scoring model, it is approved. If it doesn't, it won't be. Still other lenders use a combination scoring system with an underwriting process that lets the manager override the computer if a loan makes sense due to equity or some other factor."

If F&I managers can effectively communicate with lenders and talk about the aspects of the application the underwriter must consider, they can help the underwriter overcome reasons why a loan may not be approved, says Andersen.

Household's Bharadhwaj concurs that dealerships must better understand lender programs. The fact that they don't, he laments, has strengthened the barrier between lenders and dealers.

"It has become tough for the dealership to really sit and spot the customer in terms of whom to send in to," says Bharadhwaj. "I think that's a big challenge today."

To help dealers understand its guidelines and underwriting methodology, Household publishes a rate sheet disclosing the different gross advances based on the deal at hand. The company has established a program specifically for recently discharged bankruptcies.

Changing Perspectives

However, Bharadhwaj adds that such measures alone are not enough. Dealers must rethink their business model in the wake of radically altered market conditions.

"Dealerships need to think differently about profitability," says Bharadhwaj. "I think lenders bought a lot of high-risk loans with high advances in the past, but we are certainly not going to be as aggressive in the future as we were before."

Instead of trying to pack in the backend to maximize participation, dealers should have the goal of putting the right person in the right car, Bharadhwaj says. Dealers need to rethink subprime -- their orientation toward it, their sales approach and the concept of profitability.

"Dealers have to really reinvent subprime to be prepared for the next few years," advises Bharadhwaj.

On the other hand, lenders should exercise more trust in the finance managers they work with, based on their track record, offers Padilla. F&I managers could also give lenders they haven’t worked with before recommendation letters from previous lending partners.

Jenkins of Bar None believes that if lenders were more open to overriding a decision based on certain factors -- new or updated information or another credit bureau’s examination -- it would go a long way toward building that bridge.

Keith Tuber is vice president of corporate communications for the College of Automotive Management, an F&I training school. A former journalist with 16 writing awards, he spent a decade at the Los Angeles Herald Examiner and has written for dozens of publications including the Los Angeles Times.