2014 Expected to Be Banner Special Finance Year

Dealers, vendors and finance companies all attend the annual NADA convention for a variety of reasons – education, opportunity to see the latest in products and services, to network, and in some cases, for the parties. My annual trek is always with the focus to get important face time with the top executives of the banks and auto finance companies that serve our market. It give me the chance to learn what is “new and improved” about their programs (in order to be able to help dealers understand what that means for them), to learn how their company is doing and what to expect over the next 12 months, and finally, where they see the Special Finance industry in general heading.

For a myriad of reasons, two years ago I predicted a downturn in the 4^th quarter of 2014 (and still expect it) – so all of my conversations included that – but I came away from the convention definitely feeling better about 2014 – actually very bullish – and any impending downturn.

The Past

The Special Finance industry has been very cyclical over the past 25 years. About every five or six years “lending” has gotten very competitive (read “loose”) leading to a few companies really stretching the envelope with regards to dealer advance, loan-to-value ratios and term. It happened last in 2006 and 2007 when I stated often that even a trained monkey could structure a SF deal, throw it at the wall and make it stick. Companies in bullish markets fight for share then “suddenly” there is a hiccup or two.

After said hiccup comes a period where dealers find it is tougher to get deals done, and the reverse occurs – advances tighten and fees/discounts seem to increase. This last happened in 2008 and 2009 when Special Finance companies and banks drastically tightened up when it became extremely difficult or even impossible for those that need to borrow capital to lend to do so (all caused by factors not involving auto). Many dealers thought that the end of subprime lending had occurred. Obviously, it didn’t.

When the tightening occurs, to no one’s surprise, those that remain generally get more profitable. Special Finance banks and finance companies enjoyed record profits after those two years of tight credit. Record profits in turn encourage growth, and loosening of the credit, which brings us to where we are today. For those of you in the business then, 2006, 2007 and even the first part of 2008 brought incredibly profitable days for Special Finance dealers and departments. That is where we are today … at least six years later in an industry that seems to cycle every five years.

The Present

The good news is that every executive that I spoke with at NADA sees a year full of continued prosperity. Even though margins are shrinking, many of the markers that tend to impact the industry – such as climbing unemployment – are still not present. Loan performance, while not as good as it was after the tight credit policies of 2009 and 2010 is still very good. Indeed, while many of the companies are happy with their market share, some are predicting some incredible growth for 2014, which means good things to the dealers and departments.

I also had the chance to assuage my concerns about the financial health to any of those that I spoke with. CEOs, COOs and presidents have been very forthcoming with me over the years and every one of them gave me the confidence that they are on very sound financial footing – no matter what happens in the market – and in spite of what the rumor mill might churn up. For those that securitize their portfolios in order to raise capital, the pricing of upcoming securitizations are expected to be at or below their last venture into the market, again boding good things.

Finally, as I also predicted two years ago, we finished at nearly 16M SAAR in new vehicle volume, the highest since 2007. All industry analysts predict that we will eclipse the 16M mark in 2014. Combine that with the fact that credit scores have continued to deteriorate, that nearly 28% of new cars sold are to subprime credit customers and you should have a recipe for good things to come.

The Future

So what does this mean to the dealers and their departments? First and foremost, if you aren’t in the game you are missing a significant part of the business. With the average credit score, as reported by Experian, for someone financing a used vehicle being 657 that means that the average used car buyer has non-prime credit. So whether new or used vehicles, why wouldn’t you want to be getting your share?

As for the actual programs, I can report through individual transactional data that is reported to me daily by dealers across the U.S., and confirmed by many of the banks and finance companies, less emphasis is being placed on down payment, even in the lower credit tiers. Of the last 1,800 deals reported to me on sales financed where the primary applicant has a credit score of 650 or below, the average cash down payment is just $961. Additionally, 111 of those deals, on credit scores below 474 (average credit score 451) , had an average cash down payment of just $869, of which 82% went through mainstream SF banks/finance companies (NOT portfolio style finance companies). [As a side note – The lowest credit tier approvals do NOT appear to be due to factory-subvented programs on new cars as might have been the case a year ago.]

To that point, roughly half of the execs opined that they are putting more emphasis on the ability to repay (payment-to-income ratio) and risk (loan-to-value) than on the initial cash investment. Couple that with some of the instant decisioning available in the market, a SF manager just cannot afford to look at most deals and arbitrarily say “this person can’t buy.” If so, you are going to be passing a lot of business.

It is important to remember two things. First, those 111 deals only represents about 7% of the total sample, so don’t expect a high percentage of these deals to be approved. Most likely there was strong income involved, and maybe even a very fresh bankruptcy filing. Second, cash down still is important – and too many dealers just don’t do a good job in asking for it.

So that is both my takeaway from NADA and my perspective as I steam through my 25^th year in the Special Finance industry. Coming from the Midwest, we say “Make hay while the sun is shining.” Even though it is still may seem like the North Pole in many areas of the country, the sun IS shining in the SF industry – take advantage of it while you can!

Greg Goebel
CEO

One of the biggest challenges for special finance pros is desking a “win-win-win” deal — one that works for the customer, the finance company and, of course, the dealership. Without direction, a subprime customer can inadvertently be steered toward a vehicle that just doesn’t work. So what should you do?

Let’s assume that your salesperson has properly asked a qualifying question or questions and determined that his or her customer does not have prime credit. He or she has brought the customer inside, completed a credit statement and conducted a quick credit interview. The deal then goes to the desk, which could be the sales manager, finance or special finance manager. This person must be aware of which finance companies are not concerned with look-to-book or approval-to-book ratios. They should also know which companies will give you a quick decision.

Now it is time to pull the applicant’s credit report from the bureau that is predominantly used in the area where you and your customer are located. Depending on the customer or the information on the first bureau, you may need to pull multiple reports. At this point, savvier managers will almost instantly have an idea of who will approve the deal and at what terms. For others, the credit app and bureaus may simply indicate how tough it will be to get an approval.

Structural Concerns

Regardless of the level of experience, deal submission portals such as Dealertrack and RouteOne really make the process easy. I suggest using a generic deal structure to submit applicants to the companies that can provide an instant approval. This generic structure would be on a vehicle with a $14,000 sale price — use a much less costly vehicle for very low income customers — and a loan-to-value (LTV) ratio of no more than 104 percent.

Keeping in mind the various companies’ minimum credit cutoff score and the finance companies in your arsenal, send it to Capital One and at least one of the following: Ally, GM Financial/Americredit, Exeter, Santander and Wells Fargo. If I wasn’t sure the deal would be approved by one of those companies, and assuming I had a lower-tier national or regional specialist in my arsenal, I would submit the deal to one of them as well.

By this time, you will have an answer back from at least one (and likely more) of the top-tier finance companies. At this point, especially for those less experienced desk managers, you should have the direction you need. If it’s a top-tier, you should have an idea of what type of deal the customer is going to qualify for. If not, you know you have more work to do.

Meanwhile, the salesperson should be sitting with the customer, not camped out with the manager. If you have a top-tier approval, the manager can then propose a price range or a group of vehicles the salesperson can suggest to the customer. In other words, don’t show them the steak if all they can qualify for is a hamburger. It is quite possible your only option will be through a lower-tier specialist, which means you will most likely focus on a lower priced (and lower payment) vehicle.

If a top-tier finance company does not make an offer, or it is an offer on a less desirable tier or structure, then it is time to dig deeper. Again, using the generic structure and your knowledge of the programs of other companies, submit them to the two companies most likely to approve under the most favorable terms. These call-backs will generally take longer as well.

Once the salesperson and the customer have found a vehicle the customer is excited about buying, the desk should structure the deal, and it should do so based on the dealership’s sale price, the chosen finance company’s approved LTV structure, and the down payment needed to make up the difference. This is the first offer.

The salesperson will learn how much cash the customer has to put down; obviously, the more the better. Then it is time to get a final approval by rehashing the deal with the chosen company’s credit analyst. During this time, the deal will most likely get tweaked. It could be the finance company enhancing its approval, the dealer cutting the deal, or the now-motivated customer bringing more cash to the table or selecting another vehicle. Once you have a structure that is acceptable to the finance company, the customer and the dealership, you have your “win-win-win” deal — one that all parties are happy with.

Is it always this simple? Certainly not. But this approach will help avoid upsetting your customers by trying to sell them a vehicle for which they can never be approved. You will also be less likely to poison your relationships with your finance companies by “shot-gunning” deals, and in the end, optimizing every opportunity that comes to your store.

Until next month, great selling!