Riding the Waves

Last year, I said that the waive of credit defaults was just beginning. First to go were those subprime loans which should never have been done in the first place, many a result of fraud and/or greed in the mortgage and real estate business. It was obvious that these loans would default. Debt and payment ratios were out of whack, in both mortgages and auto loans, and it was inevitable that these loans would go bad sooner or later.

The second waves of defaults were people who initially could afford their loans, but severe income reductions or unemployment left them unable to pay their bills. No one expected the economy to turn around so badly or abruptly, and people making good money suddenly found themselves in the situation where their payments exceeded their income. This group probably includes those newbie investors, who bought investment properties with little or no down payments, and found themselves unable to pay the mortgage or sell the property. Buyers were scarce, and mortgage money dried up. Values crashed, and many of these folks walked away from their investment properties, trying to save their primary homes.

Now we come to the third wave - folks who can still pay their mortgages or car payments, but owed so much more than the collateral is worth that they are simply walking away. Credit scores are getting trashed, but what's worse is that these folks don't understand how to deal with their newly damaged credit. People with 700+ credit scores are finding themselves faced with the prospect of trying to secure credit with a score, in some cases in the low 50o's or even lower.

For the most part, the customers care little about the consequences of their actions. Many are still under the assumption that, because “everyone is doing it”, defaulting on their loans shouldn’t matter, and they should still be entitled to low interest rates and no stip loans. They balked at providing proof of income, or phone bills and references, figuring the lender shouldn’t require and documentation for their loan. However, lenders I deal with are now asking even good credit customers for POI and POR.

Many dealers I talk to have cut back their subprime departments, finding it too difficult to do these deals anymore. Prime deals are getting tougher, and F&I profits are shrinking. But faced with the new waive of subprime customers; maybe dealerships shouldn’t completely abandon special finance. Now is the time to put your ace in the game, the special finance expert you hired to help get through these tough times. Lender relationships, knowing what deals to send to what lenders, will help dealers sell more cars, make more money, and earn new customers who appreciate a true professional, who can guide them through this newly uncharted territory they face.

I’d like to think we’re starting to see the light at the end of the credit tunnel. I just hope it’s not the headlight from the oncoming train!

Auto Loan Applicants Face Tougher Scrutiny

Dealers Must Heed Lenders’ Demands for Proof of Income, Residency, Phone Bill

By Donna Harris
dharris@crain.com
Automotive News 10/12/09

Dealer consultant Frank Martin has come to expect auto lenders to call a customer's cell phone to confirm the customer's credit information – right in the middle of the finance transaction. It is just a sign of the times.

“Even customers with high Beacon scores get calls," says Martin, who works in Boca Raton, Fla., and sometimes fills in for absent F&I managers in the stores he serves in the Southeast.

In many markets, major lenders are requiring proof of income and sometimes proof of residence even from customers with excellent credit.

Although lenders have stepped up standards during the credit crisis, finance experts also attribute this intense scrutiny to additional factors:
- Some banks report an increase in fraudulent credit applications related to the credit squeeze,
- Identity theft continues to rise.
- Lenders are subject to greater government regulation requiring them to confirm the accuracy of customer information.

Like A Mortgage
"We have seen credit restrictions the rise in each of our regions throughout the last eight to nine months even on high-prime customers," says Jeff Dyke, executive vice president of Sonic Automotive Inc., the nation's fourth-largest dealership group based on new-vehicle unit sales last year. "That includes both proof of income and proof of residence."

Chuck Butler, owner of Butler Automotive Group, says that over the past year, applying for a car loan has become almost as complicated as applying for a home mortgage.

Butler says lenders require that total debt be no more than 50 percent of income, giving them a huge cushion, "They used to allow as high as 70 percent debt," says Butler, whose dealership group encompasses four import and domestic stores in Medford and Astrland, Ore.

Julie Westermann, a spokeswoman for Bank of America, says the bank has adjusted its underwriting model to require proof of income but typically just for customers with credit scores at the lower end of prime. Experian defines prime customers as those having credit scores between 680 and 739.

Gil Rabani, finance manager for Vacaville Pontiac-Buick-GMC in Vacaville, Calif., says the lenders he works with are focusing on customers' phone numbers. "If the name and number don't match with the name, phone number and address listed in their records, customers not only have to prove income but provide a phone bill," Rabani says.

Ken Basdeo, finance manager for Star Auto Group in Queens Village, N.Y., says some major lenders are requiring proof of income on customers with A+ rating. "For 75 to B0 percent of the deals, we're required to provide proof of income and proof of residence," Basdeo says.
.
Some banks report an increase in fraudulent credit applications. Dealership employees and their customers are sometimes inflating income on the credit application to boost the chances of obtaining financing.

Identity Theft Rises
Identity theft also is rising. Such theft affected almost l0 million victims in the United States in 2008, the latest data available from the Javelin Strategy and Research Center, up 22 percent from 2007.

"Fraud has been increasing as the economy continued to sour," said Nicholas Stanutz, senior executive vice president of dealer sales for Huntington National Bank. Stanutz estimates credit fraud is up l0 to 15 percent.

Martin's firm provides temporary help to dealerships when the F&I manager is out sick or on vacation. The Florida consultant says lately, dealers have called on his firm to fill the job because they fired the finance manager.

"Many dealerships have become more seriously proactive in preventing fraud," Martin says. "What used to be a slap on the wrist has now become cause for termination."

Red Flags
All financial institutions must comply with the federal Red Flags rules requiring them to create a written plan to protect consumers from identity theft. Although enforcement of the rules was postponed a year to Nov. 1, many lenders already have stepped up their efforts to confirm customers' identities.

"No one wants to be the clerk that overlooked inconsistent proof of income or the credit manager that approved a deal with something missing," says Charles Ognibene, a Boston attorney who represents major banks and finance companies.

While Ognibene says regulation has prompted closer scrutiny of every deal, competition also comes into play: "Before the credit crisis hit, if a finance company pushed back an application because something was inconsistent and asked for more information, the dealer might have gone to another finance source. Now, with limited finance buyers, the dealer must heed when his finance buyer demands that i's be dotted and t's be crossed."

Consultant Martin agrees: "No one can afford to be cut off by a lender who is actively buying their paper. "

Sub Prime Car Buyers Still Can Find Credit

Customers Face Larger Down Payment, Shorter Loan Terms

By Arlena Sawyers – asawyers@crain.com
Automotive News 10/12/09

Even though credit is tight and captive finance companies are focused on prime customers, sub prime customers still can find credit, say dealers, lenders and other financial experts.

Melinda Zabritski, director of automotive credit at Experian Automotive, says lenders are requiring larger down payments and shorter loan terms from all consumers – especially those with sub prime credit - in an effort to manage the lenders, risk.

"It makes sense," Zabritski says. ,,As banks better manage that risk, it helps them offer better loan products to the general market."

Willing To Lend

John Cavanaugh, CFO of Automotive Credit Corp, in suburban Detroit, says many lenders have either reduced their sub prime lending or pulled out of it altogether. But Cavanaugh's company is in it for the
Long haul.

Ln late September, Automotive Credit announced that it had secured a $50 million line of credit from Wells Fargo Preferred Capital, a subsidiary of Wells Fargo & Co.

Automotive Credit purchases the loans of auto buyers with credit scores of 500 and below. About 60
Percent of its customers are franchised dealers.

"Our portfolio is performing well, and we continue to have good access to capital that allows us to grow our business and do what we’ve done successfully for a long time,', Cavanaugh says.

Jonathan Neubauer, CEO of Vehicle Acceptance Corp., of Dallas, provides financial services for dealers who operate buy-here, pay-here operations. Neubauer says his company provides dealers cash advances that when coupled with a customer’s down payment, can cover the dealer's investment in the vehicle. Vehicle Acceptance charges dealers a flat fee to service and collect loan payments.

A small number of the dealers that do business with the company also have new-car franchises, Neubauer says. "We're trying to get the word out that we are lending money,,, he sa1n. "We are willing and able to lend money to buy-here, pay-here dealerships."

The Right Vehicle

Experian Automotives Zabritski says 12 percent of people who purchased vehicles in the first half of
2009 had sub prime credit scores of 550 to 619, down from almost 15 percent in the first half of 2008.

She attributes the decline to a number of factors, including lenders that didn't provide financing or consumers who could not qualify for loans.

Consumers qualifying for deep sub prime loans - scores under 550 - made up about 16 percent of vehicle buyers through June, up from l5 percent in the same period last year

Anthony Stalworth, vice president of sales and marketing at Automotive Credit, says sub prime financing works best when dealers provide customers the right vehicles. He ,says those vehicles typically are 2 to 7 years old, a domestic brand and in good condition.

"That is where the biggest amount' of depreciation is already off the cost of the vehicle and allows our customer to get in at a reasonable payment;" Stalworth says.

"lf they do a good job putting the 'customer in a nice car and treat the customer right, we have a much better job of collecting”

No Cash, No Car

Bill Perkins, owner of two Chevrolet dealerships and a Buick-Pontiac-GMC store in suburban Detroit, promises customers he will find them financing - no matter their credit history- with one caveat 'they have to have $1,995 down; you can't buy a car without cash now, says Perkins, who sells about 140 used vehicles a month at his three dealerships. About 40 percent of the used vehicles he sells are to customers with sub prime credit.

Tony Testo, sub prime finance manager at Landers Automotive Group- in Little Rock, Ark., which handles nine new-car franchises, says he works with five financial institutions to finance his sub prime customers.

Testo says he spends an hour or i more with each customer explaining that he can get them into a good 3- to 6-year-old vehicle, but they will have to pay higher interest rates because they are high-risk customers' Testo also tells customers they need to have a down payment, typically $500 to $2,500. Testo says he empathizes with customers who find themselves in a financial bind, but he wants them to be realistic about their vehicle purchase.

"most of these people have been banged around, treated badly and told no over and over again," he says' "i tell them yes, but we have to do this together