With More Capital, Special Finance Loan Volume and Dealer Satisfaction Are Rising

Twice each year, once in April and once in November, Auto Dealer Monthly reports the temperature of the retail finance climate. Having begun this process in 2005, this is the twelfth time we have asked dealers and their dealership personnel to offer their opinions of the retail finance companies they are doing business with.

Each time, I remind dealers that the results are very much like watching the sea. Each company cycles through high and low tides. Periodically, you are either on top of the waves or in their troughs. Certainly through periods of 2008 and 2009, many dealers felt they had run aground. At this juncture, dealers feel the tide beginning to rush, and according to the finance companies, for good reason.

I recently attended the NADA Convention in Orlando (if you didn’t, you should have). I attend annually for two reasons. First, it is a rare opportunity to be able to find, visit with and thank many of the vendors that support our companies with their advertising. Second, and just as important, the convention gives me the opportunity to spend valuable time with many of the executives of the finance companies that the special finance industry depends on. This gives me valuable insight that I am able to assimilate and pass onto the dealers and their departments. It also gives me a perspective to better interpret the results of our annual Dealers’ Choice Awards (DCA) in the SF segment.

First a word about our winners, which are also detailed on page 32 of this issue. For the third time in six years the little engine that could, Regional Acceptance, took top honors. I am sure many of you reading this are thinking, “Who?” First, remember, the DCA isn’t a contest about size or volume. What it is about is which companies dealers feel give them the best service or value and prefer doing business with. Certainly, based on volume alone, Regional wouldn’t even be on the map.

I have always told dealers that Regional is a relationship company. They build their block of business through dealers with whom they have solid and trusting relationships. For those dealers, the rewards have been consistent financing and deal flow. The loyalty of the dealers using Regional is evident in that they always vote heavily and positively, as it is the only subprime credit finance company in the DCA’s six-year history that has always been ranked above the category average. It is also a testament to the support team at Regional who always rally the vote.

The takeaway for dealers is that Regional continues to be a company that should be in your arsenal if you are in the subprime market niche. Additionally, they are in the shrinking group of companies that still work with independent dealers.

What is surprising about the two other companies winning awards is that they were the only two other companies that ranked above the segment average – Capital One Auto Finance and Santander Consumer USA (with its Drive program) – the fewest ever. What this demonstrates is the polarizing opinion shared by dealers of the companies serving the SF niche – dealers either loved companies or loathed them – and without doubt there were some hate votes distributed. One finance company, Wachovia Dealer Services (by the time this article appears, it’ll be known as Wells Fargo Auto Finance) has been the volume leader sporadically in the subprime market niche. As a company, it is very selective, even restrictive, of the dealerships it partners with throughout the country. In talking with dealers, they either love them or hate them, and I am quite confident that was the sentiment of the vote.

The column isn’t meant to just rehash the Dealers’ Choice Awards, however. Back to NADA. It was very enlightening.

In my discussions, the rules are simple. I always tell the executives that what they tell me is for my information as a consultant – not as a reporter, unless they tell me they would like for something to be understood by dealers. That way I get candor and what I feel is pretty much the straight scoop.

I had the good fortune to have some in-depth conversations with people at AmeriCredit, Capital One Auto Finance, Chase Custom, CPS, Santander Consumer USA, InterActive Financial, Nationwide and Westlake, among others. I can say that all the execs I spoke with were very positive about the direction of the industry and the availability of capital to facilitate financing. Most agreed that with strong earnings and returns over the past 18 months volume would soon (if it had not already) become a focal point. While everyone felt that the finance companies were exercising diligence (dealers and managers would read that as "being tight"), they also felt that with shareholders pushing for volume, in relatively short order they would be back to buying as they were in 2006.

It was like a Cold War standoff. Everyone seems poised with their finger on the button, ready to become aggressive, but no one wants to be the one to go first. Certainly, I was happy to hear that more volume was imminent but was really surprised when I heard them mention 2006 specifically, since a year ago the consensus was that they would never again let themselves return to the practices of 2006 and 2007.

I did have a fairly pointed conversation with CPS at their booth. Basically it went something like, "I have dealers calling and e-mailing. They are asking me whether or not to do business with you again. Tell me why I should tell them to say yes after you would only work with them if they were to agree to spend thousands of dollars on your direct mail and lead programs."
Their response was that they had to do whatever it took to survive (I paused for a moment and wondered how they would react if a dealer told them that). The direct mail and leads are no longer a requirement to sign back up. Also, they are back on DealerTrack. They claim it is business as usual, with the exceptions that their fee structure has gone up and LTVs are somewhat lower. Credit is the same. I would say, especially to independents, go ahead. Just keep your eyes open and absolutely don't pay them a dime for direct mail or leads to  sign up.

So what is going on in the trenches? In the majority of my discussions with dealers across the country, the finance companies are putting their money where their mouths are. In the week leading up to press time, I have received three unsolicited e-mails from dealers – two of them independents – indicating that credit is flowing again. One independent’s e-mail was simple and to-the-point, “… new buyer at Chase, AmeriCredit just did a 513, and CPS a 497, things looking up in subprime.” For a dealer to make that statement, let alone an independent, just nine months after what has to be the tightest consumer and subprime credit climate in history – well, it certainly should give everyone in the business a good feeling. Without a doubt, things have swung back more toward the dealer’s liking in the past five to six months.

What does that mean to you in the dealership? It means that once again people with subprime credit are buying vehicles. It means if you don’t have all 10 critical components for success in special finance today, you are losing deals. It means that if you aren’t in the game, you are losing market share.

I urge you to take the steps necessary to hire and train your team to be competent in the subprime market niche. It is far too valuable – both in terms of sales volume and gross profit – to walk away from. The special finance market is once again ready to thrive. The brain trust of the industry’s finance companies has spoken (and to me, very loudly). Don’t miss your opportunity to add the incremental business you have been missing for the last 12-plus months. In the Midwest, you make hay while the sun is shining. Dealers, get out your sunscreen!

Vol. 7, Issue 4