By Bridget McCrea
Dealers are feeling the pinch as consolidation effects trickle through the market and lenders extend their reaches to broader swatches of car buyers.
Dealers cite a heightened risk aversion, inconsistent buying policies, and disregard for existing relationships among the difficulties they face from their lending counterparts.
For one thing, many prime lenders are just turning down marginal deals outright, rather than rehashing them, says John F. Stelly, owner and dealer principal at Nissan of Lake Charles in Louisiana. Subprime lenders are doing some rehashing, he observes, but with more stipulations required.
That means when Stelly submits a deal on a 2008 Nissan Altima these days for $22,000 in financing, he keeps his fingers crossed that the deal goes through as-is, and that it doesn’t come back with an offer for, say, $18,000. “If the borrower has marginal credit, I’ve traditionally been able to go back in and rehash the deal and get it done at $22,000,” says Stelly. “Over the last few months, lenders have been either refusing to rehash or have come up with a longer list of stipulations to protect themselves.”
To jump that hurdle, Stelly says his salespeople have been better qualifying buyers and matching them to cars they can actually afford. “Banks just aren’t aggressive on deals where someone is making $3,000 a month and looking for a $45,000 vehicle anymore,” says Stelly. “That income would qualify for a $20,000 car, tops.”
Different systems cause dealers consolidation headaches
Consolidation among providers is also making life tough for Stelly, who points to one particular merger as having significant impact on his dealership: the 2005 purchase of Hibernia Bank by Capital One Financial Corp. The former used a tier system and balked at credit scores lower than 600, he says, while the latter specialized in subprime deals.
When the two joined forces, Stelly and his customers fell prey to an automated system that turned down applications that Capital One previously would have approved. Then, a rush to fix the problem turned into an even bigger debacle that has since found the lender approving fewer loans.
“Capital One was turning down the sub-600 applications for about a month,” says Stelly. “Then, the newly merged firm got a little ‘too aggressive’ in approving those sub-600 loans and — over the last three months — has been cutting back on approving those deals.”
Jean Richard, who manages the subprime business for Headquarters Toyota in Miami, is dealing with his own set of hurdles in the lending market, begin- ning with the crossover of prime lenders into the subprime market, and vice versa. “Capital One is giving a rate of 5.4% on the prime side right now, but how long can they keep doing that?” asks Richard, who questions lenders’ new “one-stop-shop” mentality. Other lenders are offering prime borrowers loans with interest rates of about 7.25%.
Dealers resistant to change
The fact that subprime lending has also had somewhat of a “revolving door” — with lenders moving in and out of the market — has made dealers resilient to current market trends, according to Phil Villegas, head of the dealership consultancy at Miami-based CPA firm Morri- son, Brown, Argiz and Farra LLP. In constant contact with dealers nationwide, Villegas says most dealers are accustomed to fluctuations in funding and scoring criteria, with the on-again, off- again aggressiveness of specific lenders in the space.
But Brent Brown, president of the Brent Brown Automotive Group in Provo, Utah, says such inconsistencies are hard for dealers to swallow. To meet its goal of selling 700 to 800 cars per month, Brown’s dealership seeks out lenders that are consistent and reliable. “We’re in a business where we have to make educated guesses — to deliver a car at 9 p.m. on Thursday night, or not — based on past history with a lender,” says Brown. “We can’t have lenders bouncing all over the place.”
What also concerns dealers right now, says Villegas, is the tightening in subprime underwriting, similar to what’s taking place within the mortgage market. “Concern over possible delinquencies seems to have picked up some at larger subprime banks,” he says, though the late payments have not necessarily translated to higher repossession rates.
Used-car market hit hardest
Brown says used-car financing has been hit hardest by risk-aversion on the part of lenders, who are less apt to approve loans for credit-challenged buyers. “For a while, the prime lending sources were inching closer to what the subprime lenders were doing, and you could get C and B paper bought with the right criteria,” recalls Brown. “It’s tougher now, especially in the used-car market.”
Villegas, who previously worked for Ugly Duckling (now DriveTime), concurs, and says new-car dealers are often insulated from the challenges put forth by changing criteria within the subprime lending industry, namely because they aren’t purchasing cars to meet the needs of specific customers. “These dealers don’t do as much to maximize the programs of individual lenders,” says Villegas, referring to tactics like selling the merits of the program to customers. “Whereas the independent car dealers get squeezed when terms get standardized and lending standards tightened up as a result of consolidation.”
Stelly, who likes to work with lenders that consider recourse, income, and deal structure when lending money, strives to get bigger down payments out of customers whose credit may not be up to par. “If I can get $4,000 out of a customer, and if I’m financing $2,000 to $3,000 behind book value, then I expect the lender to take a shot,” he says.
From his lender relationships, Stelly also seeks recognition for previous deals done successfully. Lenders should consider each dealer’s portfolio and base decisions on those past sales, as opposed to the track record of specific customers. “Lenders should be more open-minded about recourse deals based on established relationships with dealers, regardless of what kind of mergers have taken place,” he adds.
Wary of one-stop shop
At Headquarters Toyota, Richard says he’s cautious of lenders who take the one-stop-shop approach to lending, mainly because prime and subprime deals differ. “In a subprime deal, we handle the paper differently, do a more thorough interview, and make sure the package is complete,” says Richard. “Everything has to check out, and there’s a lot more attention to detail.”
When that kind of legwork isn’t done on subprime loans, Richard says things can unravel pretty quickly, and may result in a phone call to a customer who must return a car driven off the lot a month earlier.
Despite his concern over the consolidation of prime and subprime lenders, Richard sees the current climate for lending as largely positive, and only getting better as other credit markets normalize in the next six to 12 months.
“Back in the early 1990s, we were very limited on the subprime side, and no one ever dreamed of being able to write a 72-month loan. Today banks are doing 84- and 96-month [loans] for people with good credit,” says Richard. “It just goes to show that it’s much easier to put someone in a car today than it was 15 years ago.”
