For those of us in the BHPH world, the weather for 2010 looks to be mostly sunny with a few clouds here and there and a slight chance of a shower or two (very similar to what we saw in 2009).
For the most part, 2009 was good weather-wise for BHPH. Dealers in BHPH saw a few clouds and even a shower, but overall it was a very pleasant year. Some may not agree. Some may have been too focused on the clouds or the occasional shower to appreciate or even notice the sun, but it was definitely there.
I have the distinct privilege of interacting with a significant number of dealers on a regular basis and can assure you they most certainly enjoyed the sunshine. Their sales volumes were up over 2008, and their expenses were at or below the previous year, translating to better profits than 2008. I would call those some pretty sunny skies considering the weather our fellow new and used car dealers experienced.
The clouds in 2009 came in the form of higher inventory costs and reduced availability. The costs of our cars went up again, and availability was not what we have seen in recent years. Now, the dealers who saw the silver lining took this opportunity to re-evaluate their buying practices, reconditioning practices and stocking policies to be better prepared for the future.
We also saw a cloud in the form of credit losses. They crept up slightly in 2009 over 2008, but started leveling off slightly towards the end of the year. The leveling off was due to dealers evaluating underwriting and collection practices and getting back to the BHPH core value: It’s not how many you sell; it’s how well you collect.
A shower we experienced in 2009 was the introduction of the Consumer Financial Protection Agency Bill, or H.R. 3126. If passed in its current form, it could have a significant impact on the BHPH dealer and industry as a whole. This 356-page bill would authorize the creation of a new federal agency, the Consumer Financial Protection Agency, to regulate dealers and others who engage in financial activity as well as their directors, officers and managers. It mandates that the agency “seek to promote transparency, simplicity, fairness, accountability, and equal access in the market for consumer financial products and services.” An example of one of the provisions of the bill would be prohibiting or restricting arbitration agreements (a very valuable tool in the BHPH dealer’s belt). The bill hasn’t passed yet, but it’s something to keep an eye on nonetheless.
Now, let’s look at the 2010 forecast—mostly sunny with increasing customer opportunities. Regardless of what subprime finance companies might be saying, they are not resuming their pre-2008 buying habits. That means the bad credit customer’s only option for automobile financing may be their friendly, local BHPH dealer. To truly capture and take advantage of that sunshine, the BHPH dealer will have to be able to market to that customer. This means not only having a Web site, but an effective one. It also means that the friendly, local BHPH dealer will have to have people in place who are well-trained to understand this customer and provide them with the services they need.
Another source of sunlight in 2010 is the sheer number of resources available to BHPH dealers to help them manage their businesses. I have been in the subprime finance business since 1989 and BHPH specifically since 1996, and the resources available to dealers nowadays is phenomenal. From fine trade publications (like this one) to 20 groups and organizations like the National Alliance of Buy Here Pay Here Dealers (NABD), BHPH dealers have access to information on industry benchmarks, DMS providers and capital sources, just to name a few. As with any industry, education is the key to success, and access to education for the BHPH dealer or the dealer looking to throw his hat in the arena will be a bright spot in 2010.
A few of the clouds that are forecasted for 2010 are inventory and portfolio performance. Notice they are not listed as showers, only clouds. As with all clouds, there should be silver linings with both.
With inventory, prices will likely increase slightly, as availability for certain price ranges declines a little. As we know, prices increase in the first three months of the year due to tax season and then tend to drop slightly as the year progresses. There’s a good chance we won’t see that drop this year as overall availability drops due to still-slumping new car sales. The silver lining is that there will still be enough overall inventory for the BHPH dealer. You’ll just have to be more creative in buying and reconditioning and more disciplined in your stocking policy.
As for portfolio performance, the effects of the economy have hopefully reached their peak in the BHPH space. Overall delinquencies will still run a little higher than the good old days, but it won’t be worth shouting, “The sky is falling.” Losses should almost level out for the year in comparison to 2009, due to dealers using better deal structure and collection practices. The silver lining in this cloud will be the ability to learn from the past couple of years and improve cash flow through better deal structures and collection practices.
The shower in 2010 could come from the regulatory front. The Consumer Financial Protection Agency Bill I mentioned earlier, if passed, would not put an end to BHPH as we know it, but would make it lot less fun because the bill could impose some financial aspects to the BHPH business that could make the risks outweigh the rewards.
So I guess to be prepared for 2010, you should not only have your sunglasses and sunscreen handy, but an umbrella just in case. In BHPH, as with the weather, you should always be prepared for anything.
Vol. 7, Issue 1