The past 12 months have provided a bumpy ride for most of those involved in the special finance industry. As credit tightened after capital markets vanished and delinquencies rose, dealers felt the pinch all across the country. The SF landscape is littered with the carcasses of companies no longer in business or no longer underwriting indirect subprime paper.
Over the years I have often said special finance is like the sea – there are high tides and low tides, and some days you are on top of the wave while others you are in the trough. Well, for the past 12 months some dealers may have felt like they hit dry land. For this reason, I looked forward to moderating the breakout session in which dealers reported how the four credit tiers and four market niches in the subprime industry had changed, as well as discussed the leading finance companies currently serving them.
The tiers and niches were defined by the primary factors influencing each such as depth of file, employment, stability, and key ratios such as payment-to-income (PTI) and loan-to-value (LTV). Beacon or FICO credit scores were attached to these tiers more as identifiers, not as definitions of credit. The accompanying chart will help clarify how each tier and niche is defined, you can find it here: Top Performing Finance Company Chart
I will identify the four credit tiers simply as Tier 1 (T1), Tier 2 (T2), Tier 3 (T3) and Tier 4 (T4). T1 represents the top of the subprime credit. Some finance companies will identify it as non-prime or near-prime. Whatever the semantics, the T1 customer has a deep credit file. They will have good employment time and are stable in the market. PTI averages 10 to 11 percent and in prior times would almost be an automatic prime credit deal with the captive finance arms. Dealers identified Beacon and FICO scores representing this tier as ranging from 580 to 640. In general, dealers reported receiving an average 120 percent LTV.
The elite dealers named their local credit unions as the number-one choice for this T1 based on advance and lower interest rates. Capital One was named as a close second for customers in this tier. A key for Capital One is that the customer must be in the bureau for a minimum of seven years. Chase Custom was the third financing source named by nearly all the dealers. They also were the top finance company provider for the independent dealers working in special finance.
T2 is a step down in credit demographics. It is most often considered the typical special finance customer. This tier has shorter job times and shorter residence times, but they are still relatively stable and have the ability to pay. Perhaps the key factor in T2 is that PTI must be in line, which was stated to be 11 to 12 percent. This category was identified by the attendees as having a credit score between 540 and 580, and with that, larger down payments are required and LTVs are lower. Dealers reported that the average required down payment was 10 percent or $1,000, whichever is greater, with LTVs ranging from 105 to 120 percent.
While nine different finance companies were identified by dealers to serve well in this tier, both Capital One and Chase Custom were named as the overwhelming leaders.
T3 is known for higher PTIs (12 to 15 percent), shorter time at residence and employment, and certainly rougher credit. Dealers bracketed this tier with FICO scores of 480 to 540, with many finance companies stopping at or above a 500 credit score. Down payments were one of the biggest changes noted by dealers in T3 as $2,500 or 20 percent are typical, which is a marked increase. Proper inventory becomes a very important factor in structuring deals as LTVs generally range from 90 to 105 percent. This continues to be a tier that many SF dealers struggle to wrap their minds around.
There was no strong consensus among dealers regarding the best finance company for T3, with four companies being named as strong in serving this tier. In order, dealers named Chase Custom, Drive Financial (their Complete and Solution programs), Capital One (down to a 520 credit score) and Regional Acceptance as the leaders.
Last year I nicknamed T4 the “Equity Tier” as it certainly takes equity, and often a lot of it, to make a deal. Top advances in T4 will likely be 90 percent, often dipping to 55 or 60 percent. Often business done in this tier is done as a “partner” of the finance company, where a dealer is sharing over time in the payment stream of the portfolio based on its performance. (This often makes it less attractive to SF managers doing the deal, but more attractive to dealer principals in it for the long haul.) Combined discounts and down payments of $3,000 or more are typical of T4. While the terms of credit being offered here may seem extreme, defaults and charge-offs can easily reach 25 percent or beyond. Credit scores identified for this tier would be anything below a 480 Beacon or FICO.
Dealers named Western Funding and Westlake Financial as prominent programs for T4. Another company dealers used often was Drive Financial with their Solution program. It offers an average 109% advance on most autos, and comes priced at an average 22.5% fee. Vehicles are generally under 60K miles with an average model year of 2007. Typically Solution requires a cash down range from $1500 to $3000.
Credit Acceptance Corporation was noted as a source in T4 (especially by independent dealers) and it was additionally noted that there are many state-specific or regional companies (often located in Florida, Texas, Arizona and California) that work well with this tier.
This year dealers reduced the number of niches from five to four, eliminating the Freshly-Discharged Bankruptcy niche, as it is now served by many finance companies. One of the remaining four niches almost disappeared as well – the First-Time Buyer – as dealers named Regional Acceptance as a reliable (but relatively restrictive) national source for it, as well as Heritage Acceptance (limited to Indiana, Kentucky and parts of Illinois and Ohio).
Two of the remaining three niches stem around individuals with recent bankruptcy filings. One would consist of those customers with recently-filed Chapter 7 bankruptcies that are still open and not discharged (BK7), and the other includes customers currently working through an open Chapter 13 bankruptcy (BK13).
The BK7 tier covers all customers who have filed for Chapter 7 bankruptcy, regardless of whether or not they have had the Creditors Hearing (341 meeting). The finance companies serving this segment may or may not have varying periods of limited recourse – often until either the 341 meeting takes place or the bankruptcy is actually discharged. The dealers named 722 Redemption, Prestige Financial Services and Tidewater Motor Credit as the companies serving this segment. They also noted Friendly Finance and Heritage Acceptance to a lesser degree. The biggest challenge is that all of the companies noted have a limited geographical scope, so dealers may have to work their way down the list to find one that will work in their area. Most of the financing companies serving this niche have programs similar in requirements to those for T2.
Regarding the BK13 niche, dealers noted and agreed that while there are a number of companies that may consider a BK13 niche customer on an exception basis, the best and most reliable companies regularly serving this segment are currently Drive Financial and Prestige Financial Services. They also noted that Friendly Finance and SAFCo can be of additional help. The programs for this niche are very similar in nature to those in T3 and T4.
The final niche defined is military personnel. With the tightening of capital, the dealers pegged the MILES program from Dealers’ Financial Services as the best option available. Under the MILES program, soldiers with the rank of E1 or greater will qualify. Their base program limits the amount to advance on the vehicle to $13,000 with an interest rate of 17.95 percent. They will generally advance 110 to 112 percent of average trade on the vehicle (plus tax, title and registration) and up to 135 to 140 percent for the entire deal. A flat reserve is available, and dealers must sell the MILES warranty or GAP if they choose to present after-sale products. The only other company named by some of the dealers as a viable option was SNAAC out of Mason, Ohio.
One final footnote came out of the dealer discussion. While dealers were encouraged to hear from AmeriCredit, Capital One, Chase Custom, CitiFinancial Auto and Drive Financial at an earlier convention panel discussion that capital was thawing and growth was finally predicted for the industry, they have learned over the past 12 to 18 months how important their relationships are. With most dealers and managers having felt the pinch of losing some or many of their resources, they certainly no longer take those relationships for granted. The elite dealers reinforced a point that I have made for years that communication and relationships are vital, and a dealer or department can never afford to “write off” a finance source due to the inability to put a deal together today, for you never know what tomorrow will bring.
Vol. 6, Issue 9