The auto finance business has always been an exciting and interesting industry. With evolving products and new ways to do business, ever-changing competitors, and tens of thousands of unique dealerships as your customers, this business is one that keeps you on your toes. Recent years have brought us product expansion, the emergence of over-advance lending and the increased use of risk-based pricing as a means for credit underwriting. We’ve seen process improvement technology in the form of online applications and significant improvements in industry funding turn times. Most notably, we’ve seen a change in the make-up of credit providers into what is now a much smaller list of mostly national financial services companies to go along with the financing arms of the captives. This evolution has been viewed positively by a dealer community that has long needed more stability in its lending sources.
I believe three important storylines will garner the attention of dealers and lenders through 2005 and beyond. The first centers on being fair and responsible to borrowers. The last two deal with addressing the increasingly complex needs of the lender’s customer, the dealerships.
Dealers and lenders will have to continue their focus on ensuring that borrowers are treated fairly. Industry insiders realize that the vast majority of dealers and lenders operate responsibly. We believe it is important for the industry leaders to set good examples and to constantly re-evaluate their policies. This will include practices like menu selling at the F&I level, limiting rate participation where it makes sense and providing clear training and communication to all involved in the auto financing process.
Another thing to watch carefully is the transformation of the prime and nonprime market segments. The line that has traditionally separated a primary auto finance lender from a secondary lender is blurring. Several companies including Wells Fargo Financial Acceptance now operate, to some degree or another, all the way from super prime to subprime. In addition, over the past couple of months, several captives announced their intention to migrate down from their prime buying patterns into more of the nonprime market.
Risk-based pricing and changes within the dealerships have contributed to this trend. It is difficult enough for an experienced buyer at a finance company to determine if a customer falls into a prime or nonprime credit grade; it’s even tougher for an ever busy F&I person to master many different credit programs under a changing rate environment with multiple program modifications. Compounding matters is that a high percentage of the larger dealerships have multiple F&I offices.
The theory exists that when these credit segments are offered by one company, it will lead to more business for that lender, as long as they can effectively, competitively service both. It should also mean better product and service options for the borrowers and more ease of use for the dealership. This theory will be tested throughout this year, but early feedback from dealerships shows that when done properly, it works.
The last storyline that I feel may help define the rest of the year and well beyond for the auto finance industry is the dealer community’s need for great service from lenders. This includes buyers and funders with the authority to get their deals done and attentive sales reps armed with a thorough knowledge of lender programs. I’ve spent time in focus groups, at industry events and on the phone speaking with dealerships about what they needed most from their lenders. While many dealers mentioned low rates and fast turn-time, what struck me most was that dealers’ still want a lender that will go the extra mile to help them do more business profitably.
With an increase in the use of scorecards and automation for credit underwriting, and as the auto finance industry has become more concentrated with large national financial services companies, the need for control has increased. However, with all the pressures that dealerships have on profits, they need lenders who cannot only out-national the local lenders but also out-local the national lenders.
Dealers still want the stability of a large lender. However, they do not want to give up the personal attention that goes hand in hand with a true dealer-lender partnership. The lenders that remember this will have many happy dealers as their reward.
In the first part of 2005, we’ve already seen some interesting developments. There will be challenges but no matter how it plays out, it should be interesting.
Vol 2, Issue 6
