New Threats to Credit Scores

A revised FICO formula will kick in soon, and the balances you carry will matter more than ever. Luckily, little missteps will count less. Plus: How you can protect yourself.

By Liz Pulliam Weston, MSN Money

A long-delayed update to the leading credit scoring formula is rolling out in 2009, offering a few advantages to consumers -- and some serious new risks.

FICO 08, the latest version of the FICO scoring model, was initially supposed to be introduced in the fall but was delayed by lawsuits between its creator, Fair Isaac, and the nation's three main credit bureaus.

Everybody's since made up, and TransUnion will offer the new score to lenders starting in late January, with Equifax introducing it in the spring, said Craig Watts, a Fair Isaac spokesman. (Experian, the third bureau, hasn't yet announced when it will offer the score.)

Fair Isaac says the new score will do a better job of predicting defaults than the classic FICO, which is used in more than 75% of mortgage lending decisions and by 90% of the largest U.S. lenders.

But FICO 08 is even more sensitive than the classic FICO to how much of your available credit you're using. If your credit card issuer slashes your credit limit -- which is increasingly likely these days -- you could see your scores plunge, regardless of whether you carry a balance.

Another hazard: The new scoring formula responds more negatively if consumers have few open, active accounts. Because more credit card issuers are shutting down unused and unprofitable accounts that boosts the chances of damage to your scores.
3 victories for consumers

Not all the news is bad. FICO 08 offers some definite improvements for consumers in several areas, including:

• Collections. The new formula ignores small collection accounts in which the original debt was less than $100. This is a big victory for consumers and one I've advocated for years, because niggling little debts -- created by unpaid library fines, forgotten parking tickets or a small medical bill that slipped through the insurance cracks -- had an outsize impact on people's scores.
• Credit missteps. Fair Isaac says the new version is less punishing to those who have had a serious credit setback, such as a charge-off or repossession, as long as their other active credit accounts are all in good standing.
• Authorized users. Fair Isaac initially said FICO 08 would combat potential fraud by ignoring any "authorized-user" accounts in a borrower's credit report. After a big consumer outcry and potential credit fairness issues, Fair Isaac backed off and decided some authorized-user information would be included.

Adding a spouse or child to your credit card as an authorized user has long been a good way to improve that person's credit score, because your good history with the account typically could be imported to the relative's credit file. But in 2007, credit repair companies began abusing this feature by "renting" authorized-user slots from good credit risks and selling them to strangers who wanted to boost their scores. Some of these strangers bought slots on dozens of different people's cards, boosting their scores by tens or even hundreds of points.

Lenders pressured Fair Isaac to drop authorized-user information from its calculations. But consumer advocates protested, noting that the change could punish millions of innocent parties, including spouses whose entire credit history depended on authorized-user information. Legal experts also warned that ignoring information regarding spouses on authorized credit lines could be a violation of the Equal Credit Opportunity Act.

So now Fair Isaac says the FICO 08 formula will factor in authorized-user accounts "while materially reducing potential impacts to the score," according to the company's FICO 08 marketing brochure. Fair Isaac won't disclose exactly how it does that, but speculation is that the new score will count a limited number of authorized-user accounts and ignore the rest.

Better? Worse?
Fair Isaac made another course change regarding how FICO 08 would handle "inquiries," or applications for credit. At first, the company said applying for new credit would hurt less than in the past, since initial research seemed to show that inquiries had become less predictive of future defaults. Subsequent research, though, contradicted that finding, said Watts, the company spokesman. So you still want to be cautious and apply for credit only when necessary.

But clearly, one of the biggest hazards for consumers is the credit utilization issue. As issuers slash credit limits, the gap narrows between customers' balances and their limits, which is generally bad for their credit scores.

How bad is tough to predict. A limit reduction on a single account won't necessarily trash your credit, Watts said. Because FICO scores assess a lot of data, the effect of a single factor like a credit limit reduction will depend on what other data is on the credit report and how much the line is reduced.

"The person's score could be unchanged; it could go down," Watts said. "Or in some cases, it could go up."

It's fair to say, though, that big reductions in credit limits, and reductions affecting more than one account, aren't going to be good for your scores. Credit card expert Ben Woolsey of CreditCards.com noted that issuers' credit limit reductions so far -- and the promise of more to come -- are "clearly a hazard" to consumers' scores.

Still, Fair Isaac defends the accuracy of its formulas. Watts said the company's research has so far found the credit limit reductions have affected "a relatively small population and those line reductions have been a relatively small amount for a sizable part of that population."

At the same time, he said, a "notable number" of consumers have reduced their use of revolving credit such as credit cards, which is helping to minimize any impact to their FICO scores from credit limit reductions.

"Our most recent performance study," Watts said, "indicates that the FICO score continues to appropriately rank-order consumers based on credit risk."

Different yardsticks, same strategies

Other ways to protect your scores:

• Watch those balances. The less of your credit lines that you use, the better, even if you pay your balances every month. The credit bureaus and your credit scores don't distinguish between balances you pay off and those you carry month to month; the balance that's reported to the bureaus is typically the one that shows on your most recent monthly statement.
  If you're in the habit of using a big portion of your credit limit -- because you travel on business or are chasing credit card rewards -- consider asking for a higher limit or using more than one card. Ideally, you'd use no more than 30% of your available limit at any time during the month; under 10% is even better.
• If your credit card issuer slashes your credit limit, try to get the decision rescinded (read "Thaw out your frozen credit" for details). If that's not possible, use the card less and move at least a portion of your balance to other cards or to an installment loan. For credit scoring purposes, it's better to have small balances on a number of cards than a big balance on a single account.
• Don't close accounts. Fair Isaac has made it clear that closing accounts can never help a classic FICO score and may hurt it. With FICO 08, that's even more true. You get more points for having open accounts in good standing; conversely, having a higher proportion of closed accounts can hurt you more.
• Keep your accounts active. Issuers increasingly are shutting down unused accounts, which reduce your available credit and can hurt your scores. Even if your account isn't closed, though, FICO 08 doesn't like to see a bunch of unused cards -- it wants to see you actively and responsibly using a variety of credit accounts.
• A simple way to keep an account active is to have a monthly bill charged to it, and then arrange for an automatic monthly payment to ensure you don't miss a due date (a single skipped payment can devastate a great credit score).
• Consider an installment loan. There are two main types of credit: revolving accounts that allow you to build up and pay down balances, and installment loans that typically have fixed payments that require you to pay down your balance over time. Credit cards and lines of credit are examples of revolving accounts, while auto loans and mortgages are considered installment loans.

The FICO formula has always rewarded folks who had and successfully managed both types, which is why getting an installment loan was often recommended as a way for people with troubled credit to rehabilitate their scores. The new scoring formula is even more sensitive to the mix of credit types people have and use. In the past, people were able to get and keep very high scores using only credit cards; it's not clear if that will still be true under FICO 08.

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.
Published Dec. 29, 2008

The Truth, The Whole Truth and Maybe Nothing But The Truth!

Maybe it's just here, but lately, I've run into a number of cases of customer fraud. I'm not talking about identity theft. That I can deal with. It's customers who think they can fool me and the bank!

A few examples:

• One customer provides pay stubs on delivery that are over 30 days old. She sends an "updated" pay stub to us after we spot the car... the only problem is the only thing that changed on the pay stub was the date! The dollar amounts were the same as the first pay stub she gave us, but the customer cut and pasted a new date over the original one!
• A customer provides a pay stub on delivery that appears to be legitimate. We package the deal and send it out for funding. The bank does a verification of employment and finds out that the customer is a part-time employee, and the pay stub he provided us is "not consistent with how he gets paid"
• A customer fills out a credit application and tells us he has been at his job for over 6 years. On verification, the bank finds out "Customer was just re-hired at current job 11/24/08 after being gone for years". So much for that approval.
• Three separate cases of fraudulent Social Security numbers, with one customer who could not provide the original card, but had a real good photocopy for us!

It seems as though all the press about the car business being in trouble has got some customers believing that we'll do anything for a deal. I've been approached by customers offering "bonuses" to get their loan approved. Some customers believe that we'll look the other way at indiscretions and questionable activities in order to make a deal. Others are amazed that the banks actually verify everything, and many are dumbfounded by the idea of a customer interview. I constantly have to tell my customers to make sure they answer their phone when the bank calls. Yet I still have to chase customers to get their welcome call done.

One of the things I have done to help cut down on the brain damage is require my sales people to get a "Verification of Employment" form signed by the customer when they complete the credit application. When the customer is reluctant to sign this form, it's a heads up to a potential problem with the deal. In addition, we do a reverse look up on both the home and work numbers provided. Not surprising, we find a lot of cell phones for employers, and either get a proper number, or we don't deliver the vehicle.

It's getting harder to do business these days. Every deal counts, but only when it gets funded. It only makes sense to make sure, up front, that a deal is indeed a deal, and not a repo or rollback!

Entitlement or Priviledge?

I am consistently amazed at customers who come in thinking that, despite the fact that their last vehicle was just repo'd, they want to get another loan without putting any money down. It seems that these customer believe that credit is a right, or entitlement, and that regardless of their past credit history, or lack thereof, they shouldn't have to put any money down in order to get a loan.

Well, I've done some research on this matter, and to no one's surprise, the Founding Fathers were very explicit on the rights we bestow on our citizens. Freedom of speech, religion, assembly and such were all spelled out very clearly. But no where in the Constitution could I find a reference to the right to "buy now and pay later".

I tend to believe that credit is a relatively new concept. Folks in colonial America may have had credit arrangements, but they were more likely than not between merchants and customers that knew each other first hand. Long relationships had already been established, and credit, as it was, was limited in depth and term. Small amounts for short terms, until the harvest, or the sale of a horse, or some other transaction would occur, to make good on the debt incurred. It made sense, since there was little mobility in those days, and it wasn't hard to find someone who owed you money. You rode out to their farm and asked for repayment, whether it be cash or collateral didn't matter.

Today, banks lend at more than an arms length from a customer. Few, if any of our customer actually meet the people who are loaning them the money, and so lenders look for some commitment on the part of these customers with regard to the loan. There is no "right" to credit, it is really a privilege that must be earned. Stability and ability are fine attributes in an applicant for a loan, but far too many lenders learned the hard way that, simply because a customer looks like they can afford the payment, that doesn't necessarily mean that they WILL pay them. A commitment to or "customer participation" in the loan won't insure that the payments will be made, but at least the lender knows the customer has a stake in the game. I often tell my customers that their credit challenges can be overcome with a significant commitment on their part to the transaction.

The lack of a satisfactory payment history shouldn't preclude a customer from getting a loan, it just means that they have to prove that they will actually make the payments. For too many years, auto credit was a three strike deal - regular finance, special finance, and last but not least, buy here pay here. Customers knew that they could simply stop paying on their current loan and go down the street and get another car with little problem. Lenders were flush with cash and eager to over extend credit to folks who shouldn't have gotten it. Now we all are paying the price.

There is now guaranteed right to credit. Maybe I need to right the "Credit Challenged Bill of Rights"? Kind of like the Miranda rights you hear on all those cop shows and movies. Hmmm...

What's Does It Take To Be Successful In Subprime?

Yes, it's still about the relationships your dealelrship and you have with your lenders, but the lenders are getting much more cautious with their approvals. More lenders are doing upfront verifications, and even prime lenders are verifying income on some deals. Lenders are looking more closely at DTI issues, and most payments have gone from 20% PTI to 12-15%. Huge advances are also a thing of the past; I haven't seen an approval from a subprime lender over 115% since I've been back here. 110% seems to be the magic number, and even Drive, when they give a 115% advance eat it up in their fee.

I talk to my buyers only when I have something to bring to the deal, or to make sure they have all the correct information to make their decision. Many times, Dealer Track may not transmit all the income info correctly, especially on 2nd income or part time jobs.

My secret has always been to send a lender a deal they can buy. Good business is good for everyone..good for the bank, in that they can collect the loan. Good for the dealership so we sell a unit and make a profit, and good for the customer to get a vehicle they want AND can afford. The days of stuffing a customer into a deal for huge gross profits is a "once upon a time" or "remember when" deal. If I can make $2000 profit, I'm a happy camper. I only wish I could get the huge advances with all the back end products we used to get. But by sending an application structured to the lenders guidelines, I get most of my deals approved first time out. Rehash when I need to, but I don't waste the buyer's time on an unrealistic structure and expectation.

I also maximize my relations by telling the lenders upfront about problems or obstacles they might encounter when it comes to funding a deal. Cell phone bills, landlord verifications, anything that might be a problem for them is expressed upfront so there's no surprise on either end at funding.

Full spectrum lenders? A figment of your imagination, like unicorns or the Loch Ness Monster! No one is buying the "full" range of customers. The only lender I have digging deep is S.E. Toyota, and only on Toyota products. First time buyer programs have pretty much evaporated, with Drive and Summit doing these deals, but with limited advances and payments. Many lenders have increased their minimum criteria, raising income to $1600 or more, minimum 1 year on the job, minimum down payments, etc. "No money down" deals followed the unicorns out of town!

I spend time talking to my buyers and reps about their programs, and what they are looking for, not what I want. I have all the 560 and up lenders I need, the problem is the customer demographics here are way below that. My average FICO score falls below 520, with mid to high 400's the rule rather than the exception.

Foreclosure is a big problem here, and most of my lenders won't approve a customer in foreclosure. Once the foreclosure is over, however, it's open season, and I have some lenders giving decent approvals to these customers. Lately, I've seen a bunch of customers with multiple foreclosures - investors who got in way over their heads and can't get out from under now. Many of these customers knew they have credit problems, but still think they can negotiate the terms of the loans. Many leaved pissed off, only to come back a day or two later, after they realize I was honest with them, but other lenders have already sent the applications everywhere, and it's getting harder and harder to turn a decline around.

I have been talking to many deep lenders, trying to find other sources, but many have limited recourse (first 3 payments or first payment default). I had a few lenders who want us to pay them an upfront fee to sign up with them, and many of the dealer agreements I've looked at appear to be written by Chinese lawyers (lots of print that you can understand).

It'a A Jungle Out Here...and It's Getting Harder to Navigate

The lead story in this week's Automotive News reads "Credit-crunched". That doesn't begin to tell the story!

Almost daily, I'm am harangued by sales people who complain about the deals they used to get done. You know, the ones where the customer can't prove their income, or the ones who only claim to credit fame is a repossession. I constantly remind them that things are different today, that getting proof of income (POI) waived, and getting a marginal customer with a high credit of $300 a $20,000 auto loan is just not happening these days. It's not that I don't want to do the deal, it's that I don't want to deliver a vehicle I know we'll have to take back in a week! Lenders are tougher and tighter these days, and while I have all the 560 and up lenders I can use, I wish there where more of the sub 520 lenders available. And then I have to explain that a higher FICO score doesn't necessarilly mean a an apporval.

Here in south Florida, the problem is probably more acute than other areas. Like California and Las Vegas, we are faced with a mounting foreclosure problem. Customers come to us in the midst of foreclosure and want a newer car, or they want to trade in a vehicle they bought 6 months ago because some sales rep told them they could trade it in after ONLY 6 months. It's hard on everyone when we have to say "No" to a customer. Many Special Finance departments appear to be "Deal Prevention Departments" This is fair from the case.

I believe that most of us doing Special Finance these days have a pretty good handle on what our lenders will buy and fund. Delivering a customer and signing papers takes little talent, the real talent lies in making a profit AND getting the deal funded. The days f jamming a deal down a lenders throat are long gone, and Special Finance managers that don't partner with their lenders will find themselves running short of lenders real quick.

My lenders know that I send them applications they can buy, and my deals go in clean and ready to fund. Maybe that's why I got a lender who had shut this dealership off after they had looked at 62 non-buyable applications the month before I got here to turn us back on. In August we funded three deals with them, and this month 5 more!

Yes it's getting harder to get deals done. Yes, lenders are fewer, and profits are getting leaner. 145% advances...I only wish I could get those on a regular basis. But making lemonade out of lemons is what I get paid for, so...

Good Business Has To Be Good For Everyone

Well, it's been 2 weeks back in the seat. While I'll be the first to admit it's a different world today, I can't really say that it's that much different from what I remember. While there have been a number of lenders leaving the market (HSBC, Triad, UACC) or others that have been retreating or reluctant to expand, the lenders that are left are still buying deals. The only difference these days is that lenders are looking a lot harder at the applications they receive.

Good business has to be good for everyone. That rule has never changed. A deal has to be good for the dealer (there's a profit to be had), the customer (the payment is affordable) and the lender (the loan is collectible). If is doesn't work for any of the players, there's no sense in doing the deal.

The lenders I've spoken to lately all ask me the same question. They want to know how I decide where to send an application. That hasn't changed since I got started in Special Finance. I send the application to the lender I think will buy the deal. I make sure to know each lenders guidelines, and avoid sending an application that I know doesn't meet their basic criteria. If the income is too low, or the score to low, or it lacks the length of employment, I don't send it to a lender who has those criteria. Keeping non-complying applications from lenders that won't buy it keeps look to book in line, and builds credibility with your lenders. It makes it easier to ask for a favor when necessary, because they know you know what you're doing.

Yes, the number of sources has shrunk, and the days of easy credit and no money down are long gone. Yet the customers still expect it. The majority of my day is spent explaining to customers that simply because they look they will pay the loan, lenders know that this does not necessarily mean they will. Making the deal good for everyone is what works today. And that's the thought for today!

Changes in Attitude, Changes in Lattitude!

It's been a while since I've been here, and I apologize to those of you who follow this blog. As you're reading this, I have returned to my roots in South Florida, taking a position with one of my former clients as Director of Special Finance.

After three years outside of the dealership, I decided I needed to go back inside to get a clear understanding of today's market. Everyone has been telling me that things have changed, and indeed they have, but I decided that the only way I could truly understand was to see for myself. Special Finance is a lot like skydiving... everyone knows how it's done, but only those who have actually jumped can tell you what it is like!

So, it is with that thought that I have "jumped" back in to the dealership. I had worked for this company before I decided to move to Charlotte, and when the used car director called me to ask if I knew anyone who was looking to make a move, well, as they say, timing is everything. After some careful consideration ( and a pay plan that was too good to pass up), I headed for the airport and here I am.

I'll be writing here on a regular basis, as well as in Special Finance Magazine. A view, from the front line so to speak, trying to bring a fresh perspective on what is really happening in dealership TODAY! In the meantime, I welcome your insight and comments. Send your thoughts to subrpimecoach@hotmail.com and I publish them here.

It's good to be back. I forgot how much I missed this, and look forward to sharing my stories with you. Until then, remember..."If everybody could do this, they wouldn't call it Special Finance!"

Take Time to Talk to Your Customers

I've just returned from 2 weeks working with a client dealership to get their Special Finance efforts off the ground. To say it's been a challenge would be an understatement! Yeah, times are tough, lenders are tight, new vehicle sales are way down, and the used car market is all over the place. Some dealerships are sitting heavy in full size SUV's and pickups, and auction prices are sky high on economical units that are, with $4 a gallon gas, the most desirable.

Despite all that, credit challenged customers still need loans, and the vehicles that go with them. The problem, to me, seems that, while market conditions have changed dramatically, the way business is done still remains the same.

Sales people will always be sales people...motivated to make the sale, and the associated commission. To many sales people, it's a numbers game. The more folks you talk to, the better the chance you'll make a sale. Take more "ups", and sooner or later, you'll find a buyer.

Most dealerships boast of a 20% closing ratio, so the old "more is better" philosophy takes over and we find ways to flood a showroom with customers, figuring that somewhere in the crowd there's got to be a buyer or two. If we can bring in 100 folks, the numbers say we'll sell 20 units.

Truth seems to be that, if only 20 of those folks want to buy, and as NADA says, 3 out of 5 of those customers have some kind of credit problem, unless your sales staff can spot it early enough in the process, you spend a lot of time selling vehicles to folks who can't buy, even though they want to! When you finally discover this, they've already committed to buying the unit they selected while they were out on the lot with the sales rep, and unfortunately, the lenders won't qualify them for that unit.

Take some time to sit down and talk with your customers. We used to call this the "Discovery" or "Qualifying" stage of the sales process. Ask your customer for permission to sit down and gather some information about them and what they came in for. Ask them about their previous car buying experience. If it was good, why didn't they go back to the last dealership they bought from. If it was a bad experience, ask what happened. You'll probably here some horror stories about your competitors, some of which will scare the heck out of you. So far this week, I've heard tales of bait and switch, straw purchases, and possible fraud, from customers that were, to say the least, a bit upset with the last dealership they bought from.

I've also seen customers put onto $38,000 new vehicles who were no where near able to purchase such a unit. Even though the customer said they had previous financed a vehicle with a prime lender, no one bothered to ask if things had changed in her life recently. Then there was the guy who pulled up in a 24 year old car with the windows down on a 98 degree day, that tried to buy the 2003 Hummer!

It all comes down to this simple concept. Talk to your customers before you walk them out to the lot. The more your customers talks, the more you'll find out information that will help you control the process and move it in the right direction - good credit customers to the lot, and credit challenged customers to the finance office.

Look at it this way. If this helps you sell just 1 more unit a week, how much will that mean to you at the end of the month? Sounds to me like money in YOUR pocket!

Good News, Bad News

According to Insure.com, smaller cars may mean bigger insurance premiums for customers. Although smaller, more fuel efficient vehicles may be more desirable by customers, the premium price they may command along with higher insurance premiums may make this choice of vehicle a poor one for subprime customers.

Knowing that insurance companies often use credit reports as one factor in determining the premium they charge a customer, subprime customers may face higher premiums regardless of the vehicle they buy. Now add the higher premium for smaller vehicles, and now you have the double whammy!

Recently, Insure.com wrote "Small cars tend to increase insurance costs because they get into more crashes," says Russ Rader, a spokesman for the Insurance Institute for Highway Safety. "There's a myth that a smaller car is more nimble and helps you avoid crashes, but smaller cars tend to have more collision losses."Of course, it's not the cars causing the accidents -- it's the people behind the wheel.

"Part of the reason is the driver," Rader says. "Smaller cars tend to be less expensive and driven by younger, higher-risk drivers. And they think they can zip around in traffic."
When auto insurers see more-frequent and more-expensive claims attached to certain vehicles, they rate policies for those vehicles accordingly. Thus if you buy a smaller car that has a history of high insurance losses, you're essentially paying for the blunders of other drivers of that vehicle model. "

Make sure that insurance premiums don't kill a deal for your customers. Be sure to discuss insurance, and have them check the premium BEFORE you contract them. There's nothing worse than having to unwind a deal because your customer can't get or afford insurance.

I Need Your Help to Figure Out the What Are the "Best" Subprime Vehicles

I'm trying to compile a list of the best vehicles for Subprime. I'm looking to find out which cars, trucks, SUV's, minivans or crossovers tend to be the most popular for special finance customers, as well as which tend to be the most profitable for special finance dealers.

Please put together a list of your top 10 selling vehicles and email it to subprimecoach@hotmail.com. Submit your lists no later than July 20th, 2008, and I'll compile the results and publish them here, plus, I'll personally email everyone who responds a copy of the final list. Make sure to include your name, the dealership you represent, the location (city and state) and your position there.

Thanks for your help.

Nine In 10 People Expect Ballooning Costs To Squeeze Them Financially

A recent AP/Yahoo News poll found 9 out of 10 respondents worried about how rising gas prices will effect them. Many are already cutting back on other expenses to cover the increase in the cost of a fill up. While some have gone to more economical vehicles, others are cutting back in other areas as well, switching to cheaper alternatives, or in some cases, foregoing additional expenses like summer vacations.

What was interesting in this poll was that it appears that all segments of the population are worried about their economics, and what's in store for them.

According to Alan Fram of the Associated Press, 47% of those surveyed expect higher gas costs to cause serious hardship. " Lower-income people are bearing the brunt of it. As higher prices push grocery, pizza delivery and other costs upward, just over half of those without college degrees – and about the same percentage of those earning less than $50,000 a year – are expecting serious personal financial problems to result."

Fram writes that "... significant numbers of the better-off are feeling pain, too. Four in 10 people in families earning $50,000 to $100,000 annually, and one in six earning more than that, expect serious financial hardships from rising gas costs, as do one in three college graduates...Two-thirds of those earning under $25,000 a year are cooling and heating their homes less, as are nearly six in 10 people earning more than $100,000. Just over four in 10 of the lowest earners are cutting vacation spending – only slightly likelier than those earning at least six figures to do so."

Free credit monitoring a boon to homebuyers

Kenneth Harney
Charlotte Observer, 6/29/08

If you're thinking about buying a home or refinancing — even if you've got excellent credit — you may want to avail yourself of a forthcoming free service that could help you get a better mortgage rate.

Under the terms of a national class action settlement, you may qualify for six or nine months of daily monitoring of your credit file plus unrestricted access to your credit report and score. To be eligible, you need to have had any form of open credit account — a charge card, student loan, auto loan or a mortgage — at any time between Jan. 1, 1987, and this past May 28.

Eligibility expires Sept. 24.

The free monitoring services could prove especially useful for homebuyers who need to keep an eye on their credit reports in the months immediately preceding their loan applications. Any glitch, inaccurate negative information, or missing positive information in their files could depress their credit scores.

That, in turn, could make it tougher for them to obtain the best rates in today's market — where lenders are demanding higher credit scores for their standard rates, and often won't touch applicants who have low scores. For homebuyers with minimal down payments, there's a double whammy: Mortgage insurers have imposed strict new minimum credit scores for applicants with less than 20 percent down payment cash.

Here's a quick overview of the class action and how it might be valuable to you. Under the terms of a settlement agreed to by TransUnion — one of the three dominant credit repositories — you can visit a special Web site (www.listclassaction.com) or can call a toll-free number (1-866-416-3470) to register a claim.

The litigation against TransUnion dates back to 1998, when plaintiffs first charged that the company sold consumers' personal data to marketers in violation of federal law. Sixteen class action suits were consolidated into a single case.

TransUnion denied all wrongdoing, but as part of the settlement agreed to create a $75 million fund to compensate affected class members. Since the class was defined as virtually anyone who had an open credit account anytime during the past 21 years, there's a good chance you're a member.

The settlement sets up a tiered menu of remedies for you to choose from, including:

• Nine months of free credit file monitoring services if you agree not to file an individual lawsuit against TransUnion seeking damages. In addition to monitoring — where the bureau alerts you by e-mail within 24 hours of any significant change in your credit data — you can also lock your entire file so that lenders, insurance companies and others cannot access your TransUnion report without your permission.

On top of this, you can receive “unlimited daily access” to your credit report and TransUnion credit score, plus a “suite of insurance scores and a mortgage simulator service” to help you qualify for a better home loan rate. TransUnion estimates the current retail value of this option at $115.50.

• Six months of free credit monitoring, credit lock privileges and unlimited access to your credit report and score. This option, valued at $59.75, allows you to receive a possible cash payment out of the $75 million fund if any money is left over after paying lawyers' fees, notification costs, and priority payouts to named plaintiffs.

• Even if you opt to file an individual lawsuit against the company, you are still eligible to receive six months of free credit monitoring.

One downside for mortgage applicants: The credit score you receive from the settlement agreement will not be a FICO score — which is the dominant score used by mortgage lenders. It will be TransUnion's proprietary score, which may be roughly comparable to your FICO score but sometimes can differ substantially.

The key value of the settlement options is the unlimited access to your credit file, with none of the usual costs. Plus with the monitoring service, you'll be able to spot any monkey business going on in your files, such as unauthorized use of your credit cards or identity theft.

If you're serious about getting a mortgage in the months ahead, this is a rare slam-dunk.

Don't Abandon the Ship (or the Land Barge!)

Auction prices and wholesale values of large vehicles are falling faster than a rock off a cliff. Full size pickup trucks and SUV's are loosing money faster than a compulsive gambler at a crap table. And the experts predict it is only going to get worse.

Ford has delayed the introduction of its '09 F150 by two months, to help dealers move existing inventories of new 08's. The June 23rd edition of Automotive News features an article on page 1 entitled " 'Like House of Cards', Used Trucks Fall." Automotive Re-marketing recently listed vehicles that had the sharpest drop in wholesale values. Is there any good news left out there?

Despite all the "bad" news, there's some good news deep within. Consumers still need larger vehicles, and dealers should not completely abandon these vehicles. Particularly in regard to sub prime customers, some of these folks need a full size pickup or SUV in order to work, and not having ANY of these vehicles on your lot could easily cost you a sale.Now I'm not saying you should stock your lot chock full of V-8's and mammoth trucks, but with these vehicles showing a tremendous spread between wholesale and NADA Trade-in, you may be able to structure deals significantly enough behind book to get a lender interested in the loan.

Lately we've seen spreads running in the thousands between Black Book and NADA trade. The opportunity is there to move some of these units, especially if you can buy them substantially behind book, which is a likely scenario these days.

Keep an open mind when it comes to the"land barges". Stock a few and you'll not only have a vehicle a customer may want and need, but the opportunity to structure a profitable and attractive deal for both the dealership AND the lender!

A New Idea for Limited Credit Customers

This came to my attention just today. With the vast number of customers who have thin or limited credit files, this may help you help them build a file and either create or improve their score.

New Tech Tool Beefs Up Thin Files
Posted by Marcie Belles on May 15 2008 14:24:37 PDT, BankNet360

With so many banks tightening up lending standards, it seems unnecessary for a company to find ways to bring more people into the credit market — especially those with limited credit histories. But Payment Reporting Builds Credit is trying to do just that.

PRBC’s premise is simple: "There are two ways to look at [the credit situation]," said Corey Stone, the Annapolis, Md.-based company’s chief executive. "You can say banks want to lend to fewer people — which is not true — or you can say they want to lend with less risk."

According to Stone, there is a large population of low-risk consumers out there desperately trying to access capital, who can’t because they have "thin" credit files — or no credit at all. In fact, 20% of car-loan applications in 2007 were considered too thin to score, Stone said.

So now PRBC, which got its start in the apartment rental business and has since branched into the mortgage space, is dabbling in auto finance. So far, nearly 100 consumers have secured auto loans using information about rent, cable, insurance, and other typically unreported payments that they reported to PRBC. "Most of the bills we pay come long before we have a credit history," Stone said. "Yet they are all agreements to make regular payments."

Here’s how the system works: A consumer visits the credit bureau’s web site (www.prbc.com) and enrolls in the "Report Builder." From there, it’s up to the consumer to enter his payment history for any bills he chooses to report. After a minimum of six months, the consumer may use the report to apply for a car loan, for instance, provided he verifies the information with proof, like a stack of receipts from the water company. Customers may also opt to have online payments automatically added — and immediately verified — to their profiles. This is all the more handy, since verification is the only cost for users of the site. Users pay $5 to have their personal information verified, and between $15 and $20 to verify each payment account.

PRBC is talking to several national auto lenders about rolling out the project in the direct auto lending environment within the next four to six months, Stone said.

IN MEMORIAM - CHOOCH 10/1/93 - 6-3-08

You'll probably remember Chooch as my Border Collie, the recipient of numerous credit offers and mailers from various sources. Previous post have included several examples that begged the question, "Who's reading your mail?"

We laid Chooch down this morning. Her health had slid dramatically in the last month or two, and she had lost half her weight lately. Chooch had been having difficulty walking the last few days, and had not eaten either. She had been laying in my office, or in her corner of the dining room, and this morning, we took her to the vet to see what was going on.

After examining Chooch, the vet told us that we had come to the point where a decision had to be made. We could get her appetite back, but she probably wound not be able to walk again. After much soul searching, and a good amount of tears, we decided it would be best to allow Chooch a peaceful and gracious ending to her life.

I adopted Chooch from the Broward County SPCA in Fort Lauderdale back in October of 1998. My son and I had gone to look for a dog for me, since he and his mother had gotten custody of the two dogs we had at the time. I had a border collie back in my college days, and Snoopy had lived to the ripe old age of 17 before her time had come. After looking at several dogs, I was unable to find one that I liked, and as we were walking out, I saw a sign on one of the pens that said "Choo Choo, female Border Collie". I asked the aide who was showing us the dogs where this one was, as that was exactly the kind of dog I wanted, and was told that another family was with her and preparing to adopt her. As we approached the door, in came this adorable little black and white hound, and I instantly said, "Don't put her back, I'll take her!" My son and I went out to prepare the paper work, and he picked out a bright red collar for her to wear home. Ten years later, the collar remains, with her license and tag still attached.

Over the years, Chooch has been more of a roommate than a pet. She often slept in the other bedroom, and at times seemed to be a bit of a recluse, but always came out to say hello to a visitor. She enjoyed riding in the car, especially with the window open, and seemed to enjoy the times we took her out on the boat we had in Florida. She was never much of a swimmer, and seemed to have a distinct dislike of the water. In her later years, she would hop when she barked, and Chooch never ceased to be a delight, even lately when things weren't the best for her. She was my companion through the hard times, and I like to think that she may even have saved my sanity, giving me something to care about when nothing really mattered.

I'll be constantly reminded of Chooch, each time her name shows up on the caller ID in my office, or whenever a piece of mail comes addressed to her name. Ten years together seems to have flown by, and I will miss her terribly. God bless you Chooch, and thank you for the best years of MY life!

Another One Bites The Dust

The following notice was posted on Triad Financial’s website last week

IMPORTANT DEALER NOTICE

Effective May 23, Triad Financial Corporation will cease all lending operations for its Indirect Dealer Channel. Conditions in the financial markets have been extraordinarily unstable, and have hindered our ability to adequately and cost-effectively fund future business through traditional methods, including asset-backed securitizations.

Triad has served the dealer community for more than 18 years, and values the relationships we have enjoyed with you and the customers we share. We will no longer accept new applications as of 5 p.m. today.

Triad will, however, honor existing approvals and fund eligible contracts forwarded to us through June 23. Triad will continue to operate and fund loans in its Direct-Lending Channel, RoadLoans.

On behalf of our fine team of lending professionals in our Credit & Funding Center in North Richland Hills, Texas and our highly dedicated Sales team across the United States, we would like to thank you for your business. We value the support you have shown us over the past 18 years and wish you future success.

It seems like the handwriting on the wall is becoming clearer, and not only is it getting tougher for consumers to get a loan. It’s getting tougher for the lenders to securitize their portfolios to get money to fund new deals. As the marketplace tightens up on all sides, everyone is going to take a long, hard look at the business they are in.

Lenders are going to take a long hard look at the business they get from their dealers, and how that business performs over time. Dealers that provide a good mix of business which performs at an expected level will continue to enjoy the relationships they have with lenders they deal with. Marginal deals, and dealers that provide them, will become tougher to find a home, as lenders consider whether that dealership should remain a part of their “team”.

Now, more than ever, it is critical to know how your lenders look at your dealership. What is the value your dealership has to a lender? Are you a winner or a whiner; do you work your customer and then the lender, or do you try and break a lender’s back before you even try to close a customer.

When lenders find it harder to secure funding, it all flows downhill. Until the markets rebound, and investors see the opportunity in these deeper lender portfolios, it’s going to harder on everyone involved. The days of “EZ Credit” are long gone, and customers need to realize that credit id a privilege, not an entitlement. Educate your customer on the process, what’s involved and how it works. Help them understand that it’s a different game now. You may be able to get them approved for a loan; it’s up to them to determine whether or not they can live with the terms and conditions of the approval!

It's Finally Happened...Now I've Heard It All!

“Guns and Gas”Multi-line new car dealer in Butler MO gets a lot of free publicity with controversial promotion

DealersEdge Daily Headlines (5/22/2008)

Buyers of new vehicles can choose between a $250 gas card or a semi-automatic hand gun. So far 80% opt for the gun.Max Motors in Butler Missouri is a GM, Ford and Chrysler dealer offering a wide variety of new vehicle brands. The “Guns and Gas” promotion is getting him a lot of free publicity and runs through May 31.

This story is getting a lot of play on local Kansas City news stations and newspapers and also has resulted in an Associated Press report. There was no indication in any of the news reports of how successful the stunt was in producing new vehicle sales, but it certainly has been successful in putting this small-town dealer on the map. Butler is a town of about 4,200 and lies about 30 miles south of Kansas City.

The Max Motors Web site trumpets the promotion with a cartoon character holding a pistol in one hand and a gas pump nozzle in the other. Under the banner- “FREE Handgun* or Gas Card with Every Purchase” comes the sub-head reading - “We are aware of the gasoline and crime problem in America. Max Motors, the Country Dealer wants to be part of the solution and not part of the problem.” The “*” spells out that the dealership will issue a coupon with which the customer can claim their pistol after going through the necessary background checks.

Some of the more colorful quotes appearing include: “I’m telling them to get the semiautomatic because it holds more rounds,” said the dealership’s general manager Walter Moore. (from KansasCity.com) or – “Just a nice small little gun,” said dealer Steve Priest. (from a report filed by WCSH) Also from the WCSH report Moore is quoted as saying, “You’ve got car-jackings. You got innocent people being shot and killed. I figure it’s time for people to protect themselves.”

In a televised video report a representative from Max Motors commented that everyone around Butler carries guns and that when they appraise trade-ins it is not unusual at all to find multiple guns in the vehicle.

There was no mention of Chrysler’s guaranteed $2.99 gas promotion or whether or not this was the inspiration for the “Guns and Gas” promotion.

I wonder...Maybe they're planning on using their new gun to hold up a gas station!

Special Finance Dealer Survey

I've added a link on the top right side of this page to a short survey. Please take a moment to click on the link and complete this 4 question survey regarding what is happening at your dealership today. Once we have the answers compiles, I will publish our findings, a try and give you all a better idea of what is going on in dealerships around the country TODAY!

We all know that the landscape for Special Finance has changed dramatically since January 1. The market is tougher, lenders are tighter, and customers are facing more challenges than ever. Take a moment to let me know what you think is happeneing at your dealership so we can help each other SURVIVE & THRIVE through these tough times. Thanks.

Two Bulls

by David Preston
www.zenfinance.ca

The advertisement says “ One months profit in just four days!” How can any dealer say no to that! Imagine, 4 days to the promised land. Clean, no mess, no hassle just profit! Well if that is the case, its obvious that dealerships have missed the boat for many years then. Imagine, staying open six days a week, all month long! Hell, they could have picked 4 days a month to be open and been done with that annoying nuisance called work, and spent more time on the golf course!

Ok enough with the sarcasm you say. True, these “staffed slammer sales” do quite a bit of volume, and move some older units for the dealerships, but at what cost to your special finance department?

Assuming you have a well run efficient special finance office, you should be able to keep the fallout to a minimum if not zero. The way to do that is by having YOUR special finance manager be kept in the loop on all deals during the event. Remember, at the end of the day, when the big top is taken down and the clowns have left, it is YOUR reputation on the line. Not just the reputation that you hold so highly with your customers, but also with the lenders.

Chances are, if your sub prime department is running as it should be your special finance manager has built a solid reputation with the lenders. The kind of reputation that takes years to develop and only one deal to destroy. Its that reputation that will probably be the reason some of the “tough” deals during the sale were approved and delivered. I'm sure most would agree that damaging that reputation in order to move a few extra units over a one week period is not worth it. I'm not saying all staffed companies are going to jeopardize your store's reputation, but erring on the side of caution in this regard, will always prove to be the correct choice.

Tips to stay safe:

1- Know each and every deal that is being presented. This doesn't mean hover behind the event's finance manager watching every key stroke. But spot check from time to time as the sale goes on.

2-Try and meet each customer to ensure they were satisfied with there experience at “YOUR” store. Ask them question about the transaction and ensure that promises made can be kept. Remember, once the sales company leaves its YOUR promise.

3-Let the sales team know what will not be acceptable when it comes to paper work, deal submissions and promises made.

4- Make sure that you are dealing with a reputable company that has a good track record and consistent repeat business with other dealerships.

5- Remember the story of the two bulls standing on the hill. The little bull looked up at his dad and said “lets run down there and get us one of them cows pa!” The big bull looked down at his son and shook his head. “No son, lets walk down, and get them all!”

...however, this is just my opinion and I could be wrong. After all, I'm just the finance guy.

Fishing Season? I Don't Think So!

I read a comment by Peter Salinas in the Dealer Business Journal, May 2008 that rings true to me: “Not many thought the national credit woes affecting subprime mortgage industry would come to so dramatically affect the subprime used-vehicle business as much as it has.”

Do you agree? Are you surprised as well? What to do…? What can we do – we have to act. Now is the time to manage our business better. How can we make the most of every opportunity in this changing market?Start by putting up the “No Fishing” sign in the F&I department. Stop fishing for approvals that fit the customer. Get approvals and let the customer decide if it works for them. It is up to the customer to decide which options work for them. You limit opportunities by spending so much time and effort “fishing” for the "magic" approval (the one the customer will sign on the dotted line). Keep before you the fact that 100% of the customers who don't get the opportunity to buy, can't! If the customer never gets the chance to decide whether t hey can meet the terms and conditions of a lender’s approval, regardless of whether it was what that customer originally hoped for, it is impossible to know whether or not they can. Let them find a way to meet the terms of the approval. "Get money down or a co-signer" is the common response from the sales desk, and with those words, the customer leaves and goes down the street to a competitor that gives them the "opportunity to buy". Now is the time to seize these occasions to educate the customer and help him or her to adjust expectations. Take the time to walk them through the reasons for the terms offered and help them to see how to make it work. You need to spend more time consulting your customers in this tight credit market.

Today lenders scrutinize the business they are doing and, as a result, those little green check marks on DealerTrack and Route One are popping up less frequently. You must familiarize yourself with the lenders and their programs. If you don’t know your lenders, you won’t know what they will say “yes!” to. Loan applications receive more scrutiny than ever before. Are you in the habit of throwing deals against the wall? Results will be predictable. The good finance managers know each lender and the kind of deals they approve.

Have you looked at the process from your lender’s perspective? It costs a lender money when a dealership sends them a deal that won’t work in their program. Build a relationship by knowing and partnering with the lenders who handle the paper in each tier of credit. Knowledge of what they look for will position your dealership for better success at approvals.

While considering a lender’s perspective, demonstrate appreciation for they do by sending some of the better customers along with some of the more challenging deals. Say thank you tangibly – send lunch in, send some cookies or gift baskets. Your investment into the relationship will pay off in a workable partnership.

The market is tough right now. Adjust your expectations and do things differently. You may not be able to hit the home run every time. So what should you do? Move the cars when you can! You may have to take the occasional short deal or move an old-aged unit. Cultivate better business habits while persevering and you will see results.

Myths and Misunderstanding of "Car Dealer Thinking"

How did the car business become so concerned with cost per sale that it mises total available profit?

There used to be some wisdom n the age old axiom of measuring the cost of advertising per vehicle sold. However do we keep the same scorecard on our newspaper, print or electronic media (TV/Radio)? Today, with some of the tools that track phone numbers , it is possible to narrow down some of this, but how often does a dealership base their numbers on the sales force reporting back the answer to the question; “How did you hear about us?”

Until recently this would have accepted this as “normal practice”, however after recent discussions internally and with a few dealers have led to an adjustment of the paradigm.

Observation I: Putting all of the available advertising eggs into the Internet may not be the best move. According to the Cobalt Study of Dealerships for 2007, while 83% of car shoppers used the Internet to research vehicles and 79% used search engines to research dealerships, just over half (55%) of the leads a dealership receives convert into sales. The study went on to say that 90% of these customers made a deal at a dealership other than the one it was originally sent to, and 30% of the leads went unanswered!

Action Step: Have you ever “Googled” your dealership? Does the dealership name appear on consumer websites like the Ripoff Report? If a dealership is depending on the internet to fill the showroom with customers who intend to purchase a vehicle from that dealership, this may be leading to a false sense of reality.

Observation II: Is the information from the sales force is accurate regarding the marketing questions they ask? For example, unless the only marketing done is newspaper or the customer carries the paper in the door, is it possible to know if they came as a result of the newspaper? Salespeople are interested in selling cars and cashing checks, so maybe next month’s ad budget shouldn’t be based on their responses?

Action Step: Review the dealership’s advertising and see how to can add accountability to the marketing efforts being undertaken through separate 800#’s, the use of live operator call centers etc. Get verifiable email addresses from potential purchasers and customers and survey them regularly about the dealership’s ads and offerings. Consider using blind advertising as a method to increase special finance efforts.

Observation III: “Car Think” math does not always produce the right answer. Take a look at a dealership that utilized two types of lead sources with, what appear to be, widely varying results:

Traditional “Car Think” math would seem to indicate that $428 vs. $1400 cost per vehicle is a no-brainer. However if one source produces 58% higher gross profit per unit, despite the higher initial cost, maybe the math is flawed. An additional $23,500 more net profit would seem to be a more desirable result, especially if this result is consistent, month after month. The question that comes to mind is whether the goal here is to increase gross profit or produced a perceived reduction of costs? Is this a quick fix or long term plans?

Is it the cost or price of a marketing effort that a dealer should have concerns with? Price is the fee per lead; cost is something that takes into consideration time, effort, results etc. So, in order to effective measure the results of any marketing effort a dealership undertakes, measure the overall cost as well as the price of every vendor and provider you deal with. If each month in the automobile business stands on its own, then it makes sense to capitalize on money spent in previous months. Make the results of any marketing effort carry over from month to month, and the dealership can enjoy sales generated by marketing dollars that were spent in previous months.

Dealerships that succeed and thrive in this turbulent time look a little deeper to find all the information necessary to make smart marketing decisions. At the end of the day, the business of selling automobiles is much more complex than it seems to those people outside of our business. Don’t get caught relying too quickly on facts and responses that are not complete or accurate

Here We Go Again!

AG Settles in Case of Deceptive Advertising

May 6, 2008 Attorney General's Office

NEWS RELEASE May 6, 2008 Jim McKenna, AAG (207) 626-8842 David Loughran, (207) 626-8577

Attorney General Steve Rowe announced today that the State has entered into a Consent Decree with Level 10 Marketing, Inc., a New Orleans corporation, and Newcastle Chrysler Dodge Jeep of Newcastle Maine. The Consent Decree, which was signed by Kennebec County Superior Court, prohibits the two companies from using unfair and deceptive advertisements or practices such as sales “vouchers” which appear to promise “$4,000 Instant Savings” when in fact such savings are not realized. Further, neither Level 10 nor Newcastle Chrysler can use promises of significant savings unless such savings can be documented, including the following:
• “Will be sacrificed for pennies on the dollar;”
• “Save up to 90% off original M.S.R.P.;”
• “Prices will be slashed for immediate liquidation;”
• “Wholesale pricing direct to the public.”

“As part of this Consent Decree, 22 consumers who purchased vehicles at the sale will each receive a refund of $550,” Rowe said.

The Attorney General’s Consumer Protection Division investigated the purchases made at the Level 10/Newcastle Chrysler sale held November 14 through November 18, 2006. It found that consumers did not receive the promised savings. “During this sale, many consumers paid non-sale prices despite promises of ‘wholesale prices’ that had allegedly been ‘slashed for immediate liquidation’” Attorney General Rowe said.

Level 10 designed the advertising flyer that was sent out in Newcastle Chrysler’s name and it also arranged for a team of salespeople to travel to Maine to deal with potential customers during the November, 2006 “sale”.

Both Level 10 and Newcastle Chrysler are now subject to a Court order that prohibits such deceptive advertising techniques in the future. Neither company admitted to any wrongdoing. Pursuant to the Court Order, both Newcastle and Level 10 must pay a civil penalty of $6,250 and refund to consumers part of the purchase price.

I am truly amazed each and every time I get one of these notices in my email. Maybe I was absent that day in Business Ethics class, when the professor spoke about good business pracitces that lead to good business. Time and time again I read about shady practices by out of state companies that come in and promise extraordinary results in a short period of time. The "staffed event" held at this dealership may not be much different than what goes on at many others; the only difference is this time, someone complained that they were misled. While we don't know how may units were sold during this "sale", nor do we know how much profit was made by the dealerhsip and the marketing comany, I do know this much - the bad press this event generated will more than likely have a negative value that far exceeds any profits made.

I've said it before, and I'll repeat myself over and over again. Before you invest money in a marketing campaign, do some research of you own. Google the company's name, check Ripoff Report.com, do your own investigating and don't rely on references the company you're planning to hire sends you. After all, who do you think you think they're going to want you to talk to?

How’s Your Vital Signs?

When you visit a doctor’s office, after they get your name and your co-payment, you’re typically ushered into one exam room. A few minutes later (hopefully it’s only a few minutes), a nurse comes in and gets some basic information. She checks your pulse, temperature, blood pressure, and asks if there have been any changes in medications recently.

This assessment of your vital signs tells your doctor if there is any problem that needs immediate attention. Sometimes, even subtle changes can be indicative of something that needs further examination. Hopefully, early detection prevents anything more serious from developing.

Is it time for you to check the vital signs of your dealership? When was the last time you took a good, hard constructive look at what’s happening and make some changes to prevent more serious conditions from developing?

Many times, the most obvious vital sign that shows a problem is declining number of sold units. Lately, this is probably becoming more epidemic in dealerships than we would all like, and unfortunately, there’s no vaccine that can prevent it in a down economy. A side effect of this can be a decline in the average gross profit per sale, as dealerships look to move more units, at any cost, in a n effort to cut inventories. Manufacturers may throw incentives and rebates on slow moving units, like a vitamin shot, to help dealers feel better, for a short period of time. But, as well all know, a vitamin has little effect if only taken once,

Dealer that thrive and survive in down times know how to adapt to a changing market. They’re proactive on their approach to tough times. Many dealers reduce advertising expenditures and look for “cheaper” sources to invest their advertising dollars. Others eliminate advertising all together, figuring the same they sell the same number of units whether they advertise or not.

.In tough times, when dollars are short, spending money haphazardly is not something any of us want to do. We look at each purchase we make to insure we get the most for our money. Marketing efforts for dealerships are not different.

Recently, I met with a client who wanted to know how many customers had come into his dealership as a result of the direct mail we were doing for him. His concern was that, for the money he was spending, he didn’t feel he was getting enough “bodies walking through the door”. When I asked him how many of the customers that had responded to our mailing his dealership had sold and how much profit he had made on these sales, he said he didn’t know, but that was not as important to him as knowing how many customers had actually come in.

The response rate in his dealership was one of the highest we had seen, yet the return on investment was something this dealership did not know. Isn’t that the most vital sign of any marketing campaign? Knowing not only how much it cost, but how much profit a marketing campaign produces, how many units and at what average gross profit each produces is the most vital statistic available. It shows the “health” of your marketing efforts, and indicates where limited dollars can be best spent to produce maximum profits. After all, anyone can sell you cheap leads, but as we all heard, “You get what you pay for!”

Look carefully at what you’re spending your marketing dollars on these days. Check the “vital signs” of each marketing sources you use, and determine which ones a providing long term “healthy” benefits to your dealership, and which ones may be “snake oil” promising quick relief, but no real growth for your dealership. To grow business these days, it going to take more than a quick fix; it’s going to take a careful analysis of what can produce the ongoing results we all want, more sales and more profits!

A Common Story These Days

Economy's As Solid As Fool's Gold

IN MY OPINION - MARK WASHBURN
Charlotte Observer 4/16/08

Those with advanced degrees in global economics can just skip this and move on to the funny pages.

This is strictly for people who don't understand high finance and desire a cogent explanation for the recent unpleasantness affecting one of our bedrock businesses -- banking.

All the bulging foreheads are gone? Good. Now, just between us morons, here's what's what.

Q. Explain the monetary system.

Simple. It's called the "Big Wheel of Capital." Banks take your money. They lend some of it out. People pay interest. That gives banks more money. They lend more money to more people. That gives banks even more money. They take that money, call it a performance bonus, and give it to the bank's big wheels.

Q. What is the dynamic of our banks?

For years, the soundtrack of Charlotte banking has been that gobble-gobble-gobble of PacMan. Our guys snarfed up other banks. That means they showed growth. That meant people with advanced degrees in global economics bought their stocks. Stocks went up. Everyone was delirious.

Q. What's the soundtrack of Charlotte banking now?

That kerronk-kerronk of PacMan ghosts. It's actually the theme song for a bank Wachovia acquired in California named Fool's Gold West.

Q. Why was that a bad idea?

People with advanced degrees in global economics didn't notice it at first, but the housing market in California was out of control. Turns out, Fool's Gold had been loaning people like $600,000 a pop so they could afford a tent in the woods. When the tents collapsed, it turned out they weren't worth that much because under the law of emerging market economics, most people had taken to living under highway bridges.

Q. What will Wachovia do?

It will follow strict industry protocol -- lay off hundreds, then throw a fancy golf tournament.

Q. What about the recession?

There is no recession. Recession is a technical term meaning the economy shows negative growth for two consecutive quarters under a Democratic president.

Q. So the economy's good?

Excellent. Ask anybody. While the bottom has dropped out of a few minor industries -- airlines, auto-making, banking, housing, retail, newspapers, dry goods, wet goods, soggy goods and "American Idol" talent -- other key sectors of the economy are showing stunning growth, like Internet manly-man potions, bankruptcy filings and Bobcat ticket prices.

Q. Are there international implications?

Sure. People willing to cross borders clandestinely in search of better earnings will go back to Mexico.

Q. Is the situation at Wachovia serious?

Desperate. In fact, word on Tryon Street is that customers who walk in to deposit a mason jar of change will no longer be treated like puss-oozing carriers of plague.

Q. Surely there must be some good news for Wachovia.

Absolutely. Come Monday, quarterly results are due from Bank of America.

IN MY OPINION Mark Washburn

Mananging Our Business

CNW: Subprime Approval Rate Hardest Hit

Special Finance eWeekly: Apr 22, 2008

Brandon, Ore. As 2008 began, dealers were already feeling the effects of the credit crunch. To add to all the predictions for new-vehicle sales to drop this year, lenders are making it harder for dealers to get those customers who do buy financed.

CNW reported that from Jan. 1 to March 20, loan applications that are eventually approved were down from a year ago. And that was the trend across all tiers, with subprime buyers being hit the hardest.

Approvals for subprime loan applications fell to 57 percent, and only 1.36 percent of all loan approvals were subprime in the first quarter of the year. For the same period last year, more than 12 percent of all loan approvals were subprime.

In addition to lower approval rates, fewer lenders are accepting applications, a trend that is causing dealers to shop multiple financial institutions when submitting an application for approval. In CNW’s research, loan applications for prime borrowers were sent to three different lenders before being accepted. Subprime applications were sent to more than five institutions to get approval.

So here's my take on this:

After spending a few days with a dealer client, I agree that we are all feeling the effects of the credit crunch. Lenders are taking a harder look at the business their doing, and those little green check marks on DealerTrack are becoming harder to find. Now is the time for all of us in the car business to manage our business better.

This means that we have to stop fishing for an approval that fits the customer. Instead, why not get an approval and let the customer decide if it works for them, We spend so much time looking for the "magic" approval, the one the customer will lay day for and sign on the dotted line, that we loose sight of the fact that 100% of the customers who don't get the opportunity to buy, can't! If you don't give the customer the opportunity to determine whether they can meet the terms and conditions of a lenders approval, regardless of how far off it may be from what that customer originally was hoping for, how do you know they won't find a way to meet those terms. "Get money down or a co-signer" is the common response from the sales desk, and with those words, the customer leaves and goes down the street to a competitor that gives them the "opportunity to buy".

After all, isn't that what the car business is all about...getting customers to buy from your dealership!

1 In 7 Worry They'll Miss Mortgage Payments

ALAN FRAM - Associated Press 4/15/08

One in seven mortgage holders worry they may soon fail to make their monthly payments, and even more fret that their home's value is shrinking, according to a poll showing widespread stress from the nation's housing crisis.

In an ominous snapshot of how the sagging real estate market and sour economy are intersecting, the Associated Press-AOL Money & Finance poll also found that 60 percent said they definitely won't a buy a home in the next two years.

That was up from 53 percent who said so in an AP-AOL poll in September 2006. Only 11 percent are certain or very likely to buy soon, down from 15 percent two years ago.

In today's economic climate, even holding onto what they already have is a challenge and source of distress for significant numbers of homeowners.

Nearly three in 10 said they are concerned their home's value will decline over the next two years, while 14 percent of mortgage holders expressed worry that they might miss payments in the next six months.

While other parts of the country have suffered from big drops in housing values, Charlotte's housing market has been healthier than those of other big cities. Last month, in a national report, Charlotte was the only one of 20 cities that continued to see average sales prices rise, though at a slower pace than in the past.

In one of the worst housing markets in the country, one nervous homeowner is Daniel Gallego, a warehouse worker in Stockton, Calif., who said he may have to sell his house at a big loss.

"We may have to move in with my wife's parents or my parents," said Gallego, 30, who has two young children. "I could pay off some debt, then we could rent, and maybe buy another house in a few years."

He said the rising cost of gasoline and other expenses have made his adjustable rate mortgage unaffordable. Because he doesn't expect his home's value to recover soon, he said he may be better off moving now before his rates rise.

One in 10 have adjustable rate mortgages, half the number who said so two years ago. These mortgages generally start at a low interest rate and are later adjusted to market conditions -- which has often meant steep, unaffordable boosts that have forced many to refinance or even lose their homes.

The growing reluctance to dip into the housing market seems to stem partly from worry that housing prices will continue falling -- good if you're buying a house but bad if you have to sell one.

The number envisioning falling prices in their area has grown to one in four, while four in 10 think prices will rise, a decrease from two years ago. Expectations for rising prices are highest in the South, with Westerners likeliest to predict they will drop.

"This is a great time to buy, but not necessarily to sell," said Robert Jackson, who lives in a two-bedroom house in Ferguson, Mo., with his wife and four young children. He said he would love to purchase a larger home but can't because even if he found a buyer, he would probably lose thousands on his house, which he bought less than two years ago.

"We're just going to have to slap a Band-Aid on it and stay here until the market gets a little bit better," said Jackson, 30.

The poll also found:
• The biggest worriers are those expecting to buy soon. Of that group, 43 percent fret that their home's value will drop in the next two years, compared with 25 percent of those not expecting to buy soon.
• Fifty-nine percent think now is a good time to buy.
• Half think this is a tough time for first-time buyers, an increase from two years ago. Nearly two-thirds think it's harder for first-home buyers than it was five years ago.

About the poll
The AP-AOL Money & Finance poll was conducted March 24-April 3 by Abt SRBI Inc. It involved telephone interviews with 1,002 adults nationwide, for whom the margin of sampling error is plus or minus 3.1 percentage points.

Included were interviews with 769 homeowners, for whom the sampling margin of error is plus or minus 3.5 percentage points. The margin of sampling error for other subgroups was larger.

My 2 Cents on the Credit Crisis

Every one seems to have an answer to the “credit crisis” we are facing today. Some folks want to tighten up credit policy. Some want to make lenders more accountable, some want the federal government to intercede and establish stringent rules and regulations to prevent this “subprime meltdown” from ever happening again.

That’s all fine and dandy, buy none of it goes to solving the problem first and foremost on most of the public’s mind these days…”What about me? What is going to happen to my_______________?” Just fill in the blank with whatever asset you might think of. After all, isn’t almost everything at risk these days?

My personal feeling is that we must be do something to protect the core investment that most consumers have made in their homes, vehicles, and their lives in general. Repossession or foreclosure, charge offs and relentless, unsuccessful collection attempts do nothing to preserve the integrity of the economy as we know it. Foreclosed homes sit vacant and fall into disrepair, and often sell at a significant and substantial loss for the creditor holding the loan on the property. Forced sales lower prices, and, in turn, lower the values of the surrounding properties. This in turn can cause additional foreclosures when property values decline to the point where it becomes pointless to continue to pay on a home no longer worth anywhere close to the mortgage balance.

Repossessed vehicles produce significant losses for lenders, when they are sold at auction to recover as much of the outstanding balance as possible. The remaining balance becomes an often uncollectible debt, as a consumer has little reason to pay off a debt on an vehicle they no longer have. The only ones who profit are the collection agencies who continually buy and resell these debts, often for pennies on the dollar.

My point is very simple. Instead of writing off a mortgage, auto loan or charge card as uncollectible, lenders might want to consider preserving the balance and foregoing the profit from the interest THEY PROBABLY WON’T EVER COLLECT WHEN THE DEBT GOES BAD! Why not consider restructuring the loan to make it affordable to the debtor to continue to pay. If there is going to be a significant loss when the debt goes sour, why not restructure the debt to the amount that may be recoverable and keep the collateral producing some income or interest or profit, instead of producing the inevitable loss.

Now, I’m not saying that all debts should be reworked, but maybe, in those cases where a debtor has an ability to make payments, why not restructure a loan to make it affordable? In cases where there is no chance of repayment, well, that’s another story. But why not work to preserve principle, and forgo profit where profiut is clearly unachievable? After all, if the likelihood of repayment never really existed in the first place, was the profit anything more than a phantom, a wisp in the wind that never really had a chance to materialize? To me, the idea of preserving the principle amount of the collateral works in everybody’s best interest.

Mr. President, Mr. Bernanke, members of Congress, lenders, creditors, and bankers alike - we all want to believe there is a solution out there somewhere that doesn’t mean financial doom for all of us. Let’s find a way to preserve the things we have all worked so hard for – our homes, our cars, our and our children’s futures – instead of just writing them off!

That’s my 2 cents…

What's next?

Slipping Scores

(from Auto Finance News, 3/3/08)

Credit scores are sliding fast. In just a single month, deteriorations in average risk scores among car buyers nationwide are noticeable, according to data from Experian Automotive. The maps below color-code risk scores for October and November 2007, the most recent months for which

data was available. Average scores in California, for instance,dropped to the 676-to-691 range in November, from 700-to-702 a month earlier. Some Northeast states realized 15-to-20-point declines in average scores. Call it the Color of Credit.

Lenders Ease Throttle on Car Loans

by Eleanor Laise - The Wall Street Journal, Apr. 2, 2008

The credit crunch, having knocked around the American home, is now rolling into the garage.

Even as the Federal Reserve slashes interest rates, it's getting tough for many consumers to find attractive terms on auto loans. Many lenders are making fewer loans and instituting stricter standards on loans they do approve, often requiring higher credit scores, making smaller loans and demanding bigger down payments. GMAC Financial Services tightened lending standards three times last year and firms like AmeriCredit Corp. and Sovereign Bancorp Inc. have recently raised the minimum credit score required for borrowers to avoid an automatic rejection of their car-loan application.

Where you live can make a difference. Some lenders are applying especially tough standards for borrowers in states hard-hit by the housing crisis, such as California and Nevada.

While "subprime" borrowers with poor credit will bear the brunt of the shifting lending standards, even "prime" borrowers with good credit may be affected by some changes. And some consumers may not be able to get a car loan at all. This year through March 20, about 90 percent of auto-loan applications from prime borrowers were approved, down from 92.5 percent for the same period last year, according to CNW Research, which tracks consumer spending. Among subprime applications, 57 percent have been approved this year, down from 68 percent early last year. Loan applications for all types of borrowers are also being sent to a greater number of financial institutions before being approved, according to CNW.

When Michael Staggs, 36 years old, of Spring Hill, Fla., set out to buy a 2006 Dodge Dakota truck last month, he was looking for an auto loan with an interest rate below 10 percent and monthly payments between $250 and $300. But Mr. Staggs, an engineer for a telecom company who says his credit isn't bad, but not great, didn't get the terms he was banking on. He put down $1,500, and his $14,000, 72-month loan came with $298 monthly payments and a 13.5 percent rate. "That's a lot higher than I wanted," he says.

Borrowers hoping to get attractive terms on a car loan should do some spadework before heading to a dealership. First, get a copy of your credit report and have any errors corrected. Then, shop around local banks, credit unions and online for pre-approval on an auto loan. Having secured the best rate you can find, head to the car lot and ask the dealer to beat that rate. "You want an offer in your back pocket because that gives you maximum flexibility when you're weighing dealer offers," says Greg McBride, senior financial analyst at Bankrate.com.

Lenders are tightening standards as more cash-strapped consumers become delinquent on their auto loans. Delinquencies hit a 10-year high in January, according to Fitch Ratings, though they declined slightly in February. Also, many auto loans are bundled into securities to be sold, but the credit turmoil has caused investors to lose their appetite for these securities. That leaves lenders with less money to lend.

The changes come at a time when many consumers have fewer options for financing a car purchase. Many people with good credit in recent years have financed a car purchase by tapping their home equity, but that source of cash is also drying up as home values drop.

In addition, a growing number of consumers are "upside down" on their current auto loan, meaning they owe more on the loan than the vehicle is worth. Among people who traded in a vehicle in February, 27 percent were upside down on their loan, up from 24 percent in October according to Edmunds.com, an automotive Web site. On average, they owed nearly $4,400 more than their car's value, a record high.

Not all borrowers will see tougher terms. In some cases, lenders are "being more generous and creative for prime consumers because they want to attract (them)," says Jesse Toprak, executive director, industry analysis at Edmunds.com. The average rate on a prime five-year new car loan is now 7.2 percent, according to Bankrate.com, down from 7.7 percent before the Fed started cutting rates in September.

But some borrowers may find they can't get as large a loan as they'd like. Whereas lenders in recent years have made loans substantially exceeding the car's worth - a common practice in the era of easy credit - some are now keeping loan amounts closer to the vehicle's value.

AmeriCredit last year reduced this "loan-to-value" ratio that it allows for subprime loans. Jon Garcia, finance manager at a Toyota dealership in Janesville, Wis., says he's seeing subprime lenders supply only 85 percent to 90 percent of the car's book value, down from as much as 140 percent previously. The changes are preventing customers from buying the cars they want and have cut the dealership's sales to customers with blemished credit by about 10 percent, relative to last year, Mr. Garcia says.
Indeed, terms are getting especially tough for subprime borrowers. At GMAC, 12 percent of new loans booked in North America in 2006 and 2007 were nonprime, but that figure dropped to 9 percent in December. Capital One Financial Corp. has stopped originating loans for the riskiest segment of subprime borrowers, according to a recent presentation by Chief Executive Rich Fairbank. J.P. Morgan Chase & Co.'s Chase Auto Finance recently stopped originating subprime loans longer than 72 months. The firm also boosted by 10 points the credit score required of subprime customers borrowing more than 110 percent of the car's value. "We're trying to lend to people who will be able to pay us back," says Thomas Kelly, a Chase spokesman.

Even borrowers with good credit may find tougher loan terms if they live in areas where home prices are dropping. Chase Auto Finance has tightened lending standards across the country, but they're "even tighter in places with declining home values," Mr. Kelly says. Falling home values generally reduce borrowers' financial resources and may hurt their ability to make loan payments. Chase is requiring more collateral on longer-term loans in "high risk" states like Arizona, California and Nevada. Sovereign in January stopped originating auto loans in the Southwest and Southeast and now limits its auto lending to the Northeast. The Southwest and Southeast "were experiencing more challenges" and "the housing market was a big driver of those challenges," says Tom Nadeau, president of consumer lending at Sovereign.

In states that have been hard-hit by the housing crisis, auto-loan approval rates have dropped more dramatically than the nationwide rate. This year through March 20, 86 percent of California prime auto-loan applications were approved, down from 94 percent for the same period last year, while 84 percent of Florida prime auto-loan applications were approved, down from 90 percent a year earlier, according to CNW Research.