Non-Prime Auto Finance Summit

Non-Prime Automotive Finance Summit

April 23rd and 24th, 2009

Mohegan Sun Casino and Resort

email info@heraldassociates.com or call 888.215.1022 Today!

The current US economic conditions have led us to the worst credit crisis in the history of automotive finance. Join the best and brightest minds in the business for a two-day leadership summit at Mohegan Sun Casino and Resort.  Together, we can reshape the future of our industry. 

You cannot afford to miss this one-of-a-kind event where we will be discussing the major problems facing the industry today and, the solutions that separate the strong from the weak.  These professionally led discussions and presentations will include:

• The State of the Industry
• The Future of Non-Prime Auto Finance
• Industry Trends and Benchmark Performance
• Special Finance and BHPH Operations
• Securitization and Capitalization
• Consumer Credit and Collections
• Deal Structure and Underwriting
• Understanding the Non-Prime Customer
• Inventory Management Secrets
• The Vehicle Wholesale Market
• Non-Prime Automotive Sales and Finance
• Understanding The Dealer’s Perspective
• The Top Lenders Today
• The Danger Zone of Compliance
• Training and Retaining the Top Talent
• Dealer/Lender Relations
• 5 Key Strategies for Success

SPECIAL GUEST SPEAKER Jeff Andretti, Indy Car Driver

 Being an Andretti made him a member of racing’s first family.   Being Jeff Andretti made him a relentless competitor who has experienced both triumphs and adversities as a professional race car driver.  His championship heritage provides him with a unique insight into competition and what it is actually like to be in the cockpit of a Champ Car at 235 MPH, racing against the “best of the best” in the world.  Join Jeff as he presents his  family secrets for maintaining The Competitive Edge.

 For The Complete Brochure, Click Here

Cost to Attend:  $495 Per Person

Discount Room Rates For Mohegan Sun

Show Me The Money!

By Tom Herald

Benjamin Herald Associates

Download Article Entire Here

There is plenty of discussion about money, or the “lack” of money as I should say, today throughout the automotive special finance industry.  Dealers, lenders, customers and even industry vendors are all scrambling for hard to find cash.  Well, I’m going to help you find some by focusing on the three revenue centers of a special finance deal.  These three centers for cash are what I call the Trinity of Profit.  They are your only true sources of cash and profit in a special finance deal.

The Trinity of Profit:

• The Lender – No two lenders were created equally and each has what they consider is the best model for making a profit by loaning money and collecting it.  The key to success with any lender is to build a real relationship with your buyers and understand their program like it is your own.  You must structure deals that best fit their parameters and what they want in a borrower.  And since there is no one-stop lending solution in full-spectrum financing, you need 5 – 7 quality lenders that cover the full spectrum of finance in your market.
• The Customer – This is the most overlooked source of cash.  Too many sales teams lose the negotiation battle for cash with their customer because it’s easier to fold than it is to ask the customer face-to-face for something the salesperson believes the buyer does not have.  I’ve sold too many vehicles to people with bad credit thinking I’ve gotten every last dime possible only to see the customer “pimp” out their new ride within the next couple of weeks with new wheels and LCD televisions.  Apple doesn’t negotiate on the price of the iPhone nor does Louis Vuitton on their handbags or sunglasses.  But we see special finance customers all the time wearing designer clothes or using expensive cell phones.  Why?  Because they want to.  And, if you don’t ask for it, you’re surely not going to get it.  The key is to get your customer to really “want” the vehicle you are selling more than anything else that is available.
• The Vehicle – Every vehicle has three different values: the “book” value, the “market” value, and the ACV…how much the dealer actually has in the vehicle.  If the ACV is too high, you lose.  It’s that simple.  You can sell vehicles all day long that make money at the auction but if there’s not enough spread between your actual cost and the preferred valuation guide in your market, you are wasting your time selling the wrong vehicle to a special finance customer.  You need enough spread behind the book to cover the discount fee plus any acquisition fees from the lender.  Otherwise, you’re making up the difference with down payment, or even worse, with lost profit.  And there is a huge difference between the “market” value and “book” value of specific vehicles.  The key is to know which vehicles have the largest spread between these two values and at the same time, is something that customers want to buy.

Now I don’t mean to trivialize the business model but I see too many dealers, managers and salespeople making the special finance sales process much more difficult than it has to be.  Or, they cut corners and take shortcuts with pre-conceived ideas about the industry, the economy, or the customer.   There are processes that have a proven track record for success and if the dealership team follows these procedures every time, without fail, and with no exceptions, they will sell more cars and earn more money.

I realize fully that our industry is changing every day and there are experienced dealerships who are really struggling to put special finance deals together.  But, don’t discard the fundamentals.  The only way to overcome the many obstacles we face is to master the fundamentals that maximize the cash from each of the three sources and look for solutions instead of problems.  Let’s take a look at the lender side of the equation.

HSBC is out.  Wells Fargo and Wachovia have joined forces to evolve the old WFS program and find their new niche.  AmeriCredit is reeling from rising delinquencies in near-prime loans and struggling to find new sources of capital.  And several other lenders have tightened their belts significantly which has squeezed profits and sales from dealers.  So, what do we do?  Heed the words of Albert Einstein and the US Marines: “Insanity is doing the same thing over and over, expecting a different result.”  Don’t be insane!  Improvise, Adapt and Overcome.  Find alternative sources and with every lender you use, adhere to three unwritten laws:

1. Dealers must know the top lenders in their market and fully understand their programs.
2. Dealers must develop strong working relationships or “partnerships” rather, with the buyers at a select few lenders and send them plenty of deals that fit their program.  It’s a matter of “quid pro quo.”
3. Dealers must be proactive with originating and helping to manage profitable loan portfolios with their lending partners.  Auto loan originations are not a one-sided business affair with the lenders having the sole responsibility for portfolio performance.  The crooks and criminals are quickly being weeded out. 

Credit Unions can and will be a powerful lending partner for a dealer that takes the time to develop a strong working relationship with one.  So can the smaller, local banks.  They operate by different guidelines and restrictions than most other lending entities and tend to take an “old school,” common sense approach to loan originations.  If the deal makes sense and is submitted by a dealership they trust, the odds are that it will be bought and quickly funded. 

Several dealers have realized this opportunity and although vehicle sales nationally have continued to slide, the credit union share of the market has increased according to the recent CUDL 2008 market report.  Credit union market share reached 20.8 percent in September 2008 which was a 3 percent increase over September 2007.  The report also shows that there has been a significant increase in loans for used cars.  Take a look at the following graphs that highlight these two key trends.

Credit unions are increasing their share of the auto lending market by being a consistent “local” alternative source for consumer financing and, by partnering with dealerships that understand and pre-empt the changes in the market.  Together, they take a proactive approach to finance that mitigates the risk of non-prime automobile loans by focusing on a sound structure for each and every deal.  It is an old fashioned business model that has stood the test of time and economics and one that makes sense for the customer, the dealer, and the lender.

Deal structure determines profit.  Deal structure dictates loan risk.  Deal structure will make or break the deal.  And, the Cardinal Law of deal structure is affordability.  Can the customer afford the payment?  Can the lender afford the risk?  Can the dealer afford the profit margin?  You can make every deal affordable by focusing on the three profit centers and understand the critical role each plays in determining the profitability and collectability of a loan.

Mr. Tom Herald is a Professional Consultant and National Trainer and with Benjamin Herald Associates.  He has over twenty years of experience in the automobile business and ten years as a dealer principal.  He is a former Air Force Commander with extensive training as a leader and instructor.  He is one of the top experts on Special Finance and can be reached at tom@heraldassociates.com or by phone 859.816.7990  

Copyright 2009 Benjamin Herald Associates, Inc.

The Perils of the Independent Car Dealer

by Ben Donnarumma

“Business at buy-here, pay-here dealerships is picking up as bigger, nationwide subprime lenders tighten credit, or quit the business… As other lenders raise their standards, buy-here, pay-here dealerships are the only option for thousands of high-risk borrowers who need a vehicle…”

These are not headlines or words from an article today.  They are from an old article I dug up in Automotive News by Jim Henry back in November, 2002.   The only difference is that these same words carry a more pertinent meaning in the industry today.  In fact for many independent dealers, they are words of survival.

I’ve seen the numbers and read the reports about the demise of the franchise dealer during the last year; that we are losing as many as 2 franchise dealers per day to the recession while many others struggle to survive.  And I agree, it’s sad to see and painful to watch.  But, what you don’t read much about is what is happening to independent car dealers across the country.  And I will tell you, my heart goes out to many of my fellow “indies” with corner lots in Smalltown, America because that number is as high as 10 per day who are going out of business.

5 Dangers for Independent Dealers

1. Lost Sales – Just like every other dealership in the country as well as many large retailers, sales have been off for several months.  This hits the independent dealer particularly hard because whenever new car sales are off, franchise dealers put more effort into selling used cars and keep more of their old trades.  Lately many large auto groups around me are now a competitor of ours since they have jumped head first into the special finance pond and just muddy up the water for everyone, especially the customers.

But just like I told my staff, patience, persistence, fundamentals and good old fashioned customer service will win out in the long run.  These times remind me of when I first started out in the car business.  In order to stay in business, I had to sell to less desirable, lower income, credit challenged customers, the ones who naturally showed up at the door from word of mouth.  Ironically, it’s these same customers who are paying the bills for us today.  They put me in business and are keeping me in business. 

Lesson:  Know exactly who you are, understand your niche, and remember to take excellent care of the customers who brought you to the dance.

2. Floorplans – Many independent dealers, even the more conservative-minded, started floor planning their inventory when sales and profits were up.  We all wanted to grow.  We were making money and a floor plan created a shortcut to rapid growth.   However, what happens when sales stop?  The bank wants their money and the inventory you bought 90 days ago has depreciated faster than Lehman Brothers stock. 

Many floor plan companies waste no time with independent dealers who are late on their payments today.  I know of several dealers who had their inventory repossessed the moment they became delinquent which just compounds the depreciation problem when their inventory is dumped at auctions, driving the prices down even further.  The good news is there are great deals for those of us who have the cash.

Lesson:  A strong reminder of something that every independent dealer knows – Cash is king!  Growth is great.  But remember; don’t grow too big for your britches.  The seams may come undone at the worst possible time.  Always have an exit plan to de-leverage your debt. 

3. Lost Lenders – If you’ve ever wondered what it’s like to be an outcast or the black sheep, try being an independent car dealer today that specializes in sub-prime sales and finance and you will know first-hand.  We must be the “least desirable” customers in the banking industry because nobody wants to do business with us. 

Now, to give the Devil his due, we are paying for the sins of several less than ethical dealers who got their backs against the wall and left the banks holding the bag, or paper I should say; spending the loan advances on cars they hadn’t yet paid for.  The end result has not been pretty for those who have enjoyed years of strong relationships with the top lenders. 

To solve this problem, undoubtedly the one common issue we all face today with the hugest impact, we have relied more heavily on our own Related Finance Company (RFC) or Buy Here Pay Here (BHPH) as it’s better known.  And for those customers who warrant a more expensive vehicle, we have worked out a recourse agreement with a local credit union to finance them and the combination is working great. 

Lesson:  Again, Cash is King!  1,400 payments per month at $90 each is an excellent reminder of what business I should be in.  Take matters into your own hands and control your own future by relying less on outside vendors and lenders.  But also treat the existing relationships with your closest banks, lenders, and credit unions like they are the most important to your business, because they are.  Lastly, take a good look at BHPH.  It’s not for everybody but it is the core of Special Finance and I can’t imagine not being it, especially today.  It was the best business decision I ever made!

4. Legal Compliance – It’s not enough that we have multiple battles to fight on several fronts but this one called legal compliance can go unnoticed for years, slowly building up until one day, Bam!  It hits you like a Kamikaze sneak attack that can instantly put you out of business.  It’s an issue that simply cannot be overlooked, ignored, or put off until you have more time to deal with it.

The new Red Flags Rule, Gramm Leach Bliley, Truth in Lending, OFAC, Fair Lending Act, and all the State and DMV requirements make doing business that was once a walk in the park, like walking through a mine field today.  Pay attention and be careful.  The consequences are just too costly.

Lesson:  Don’t overlook or underestimate the significance of becoming and staying legally compliant.   Know the rules, stay up on the knowledge, and mandate that it becomes instilled in the culture of your organization. 

5. Managing the Budget – Remember a car dealership is a business, and for many of us, it’s our way of life.  If your budget gets out of whack there is no time to hesitate.  There is no time for blame, nor time for sulking about the economy.   You can lose $50K or $75k or even more, in a blink of the eye and before you know it, there’s no money in the checking account.

And, if this happens, don’t look for Uncle Sam, your banker, or anyone else to bail you out.  You’re not General Motors!  It’s not going to happen.  Instead, you have to be proactive.  Know your financials and manage them daily.

It’s too easy to get comfortable with all the toys, gadgets, latest software and services, and even the people who become like family but cost you money.  If it’s not making you money, saving you money or saving you time, you probably don’t need it.  Get rid of it and do so in a hurry.  Because time is money and every day you hesitate could be costing you a fortune.

Lesson:  There is a huge difference between needs and wants.  Keep what you truly need to operate your business and get rid of the rest.  Check and manage the budget daily.  And when you see problems, act immediately.  Don’t hesitate.  Because an unprofitable dealership is an unsafe place to work.

Click to Download Article: The Perils of the Independent Car Dealer

Putting Life Into Perspective

By:  Courtney Cox Cole, Hare Chevrolet, Noblesville In

As we go through life, we all have our ups and downs. Every so often something happens and it makes us realize what really matters. Fortunately, we live in a Community that sticks together and takes care of each other. That is why I am writing this message.

The Father (Mike Zike) of a 16 year old child (Derek Zike) works in our Body Shop. He is a fantastic employee. On Friday, January 16th Derek was involved in a horrific hockey accident. He was playing for the AAA Chicago Fury. During the game Derek attempted to make a turn and lost an edge of his skate, fell and slid head first into the boards at a high rate of speed. It all happened so quickly he was unable to brace himself for impact. Derek was not hit by anyone; it was quite simply the result of a lost edge while trying to turn. This accident happened in Ann Arbor, MI during a tournament. He was rushed to the University Hospital. He still has no feeling from the waist down. He sustained a burst fracture of the 5th cervical vertebrae.

On the 26th of January, Derek’s lung collapsed and he is now receiving almost 100% of his breathing via a ventilator. He was admitted for another surgery yesterday. The surgery was to complete the insertion of bone in the injured area and complete the steps associated with a multi-level spinal fusion. The surgery went well and Derek is recovering. Derek’s breathing issue seems to be headed in the right direction. Although he developed pneumonia and is receiving assisted breathing following his surgery last night, it appears as though he will soon be removed from assisted breathing once it is determined he may satisfactorily breathe on his own.

Derek will remain in the hospital for quite some time. Derek’s parents,Mike and Robin, will be rotating in Ann Arbor while Derek remains in the hospital. When Derek is released from the hospital he will require
extensive physical and rehabilitative therapy. The family’s expenses will continue to grow and our help is needed. As people, we have an unbelievable capacity to come together and to help a family in need.

HERE ARE A FEW WAYS THAT WE CAN HELP:

Mail a check payable to:
Derek Zike Special Needs Trust
c/o of Founders Bank
14497 John Humphrey Drive
Orland Park, IL 60462

Donate Online at: www.derekzike.com

Any amount will be very helpful. It would also be greatly appreciated if you could forward this message to all of your friends and help this family in this very difficult time. You may also join the facebook group
Pray for Derek Zike or go to http://www.chicagofury.com to receive regular updates on Derek.

THANKS FOR ALL YOUR HELP! THIS IS WHAT LIFE IS ALL ABOUT.

Several years ago when I first started out as a dealer one of my biggest frustrations with Special Finance was paying a salesperson 25% of the gross profit for basically, just going on a test drive.  It didn’t take much talent or effort to sell a vehicle to these credit-challenged consumers who otherwise were relegated to driving their “hoopties” or taking public transportation.  From my perspective, it was like selling water to man dying of thirst.  The real challenge of the sell was getting a lender to pony up some money for a loan that in all likelihood may not be repaid.

Well, it’s not much different today with one major exception – competition.   As recently as five years ago any dealer who focused on the Special Finance customer could easily run a successful business as long as they had a few good sub-prime lenders and could find affordable cars to sell that would outrun the term of the loans.  For many of us, this business was easy and simple.  It was like shooting fish in a barrel. 

We had the business.  We had the “know how.”  And we had plenty of captive customers, desperate for a reliable automobile but with very few places to buy one.  To be successful, we didn’t even have to be nice to the customer.  We only had to be nicer than the local franchise dealer who aggressively shooed them off their lots like they had a contagious disease.  And if you had any business sense at all, it was not too difficult to corner the market for these “unwanted” customers because the demand for services was high while the supply of effective “know how”  and desire to sell to them was low.

But the industry changed and the evolution of special finance really started to gain momentum.  By 2003, several dealerships across the country were offering some sort of “guaranteed financing” to customers with bad credit.  Numerous bright, opportunistic dealers, both franchise and independents alike, started delving into the special finance segment for its huge profits.  The secret was out about these unwanted customers and many dealers were starting to prefer them over the price-conscious negotiators with good credit, fresh on the lot and armed with a wealth of internet information.

The oversimplified secret of success in special finance was a much more desirable business model, or at least something worth trying.  Many dealers signed up every non-prime lender possible, appointed a talented “paper hanger” as a special finance manager, and employed a couple of inexperienced salespeople as assistants.  They then started buying leads from a third-party provider and instantly were in the “Spy Fi” business, much to the chagrin of the more experienced dealers.

As more and more car dealers entered this segment of the market, the landscape of automotive financing quickly began to change.  Competition and capitalism were major driving forces and the sub-prime customer suddenly had more choices for buying a vehicle, both good and bad, than ever before.   As long as they had a decent paying job with some stability at their residence, they were driving, regardless of down payment.  Special finance sales quickly became a major profit center for many dealers and the “value” proposition for the customer began to focus more on “how much car they could get with little or no money down,” than on prudent deals that actually fit their budget.

The captive finance companies even jumped into the ring in full force.  And soon it became common to see customers with credit scores below a 520 drive away in a new car…with little or no money down and no redeeming credit qualities.  It seemed nobody had a concern for common sense and logic with loan originations.  The focus instead was on profit without regard for equity or concerns for loan-to-value.  

Thirty-six month terms on sub-prime loans quickly grew to forty-eight months, then to sixty, then to seventy-two and even eight-four month terms for non-prime auto loans.  Deal by deal as the market continued to grow, we struggled to maintain profit margins while at the same time cover up negative equity that in many cases exceeded the actual value of the collateral being traded.  We were inadvertently creating our own version of an economic “bubble” by putting too many people into vehicles they simply could not afford.

Can you imagine where we would be today if the automobile was an appreciating asset like homes used to be?  We would have a bigger mess than our cousins in the mortgage industry once the laws of business and economics finally collided.  It would be another fiscal train wreck, and perhaps much worse than it already is. 

So, where do we go from here?  The special finance industry will continue to evolve naturally under the brutal forces of capitalism while dealers, lenders and the manufacturers continue to react to their economic environment.  It’s back to the basics where the laws of supply and demand and the fundamentals of finance will dictate the future.  And for us, it all starts and ends with the customer – The special finance customer.

This buyer still needs reliable transportation and the associated financing that goes along with buying a big-ticket item.  And, just like the rest of us, they also want the best value they can afford to buy.  But the real art to putting together a special finance deal focuses less on what these high-risk customers want and more toward finding a lender that will finance them and still advance enough money so that a dealer can make a profit.   Every deal must be aggressively negotiated for sound, profitable and collectable structure because the list of lenders lining up to loan money at unrealistic terms is dwindling as the market settles back down to reality. 

The special finance segment now comprises over 60% of the market and continues to grow while at the same time, we have collectively lost 40% of our ability to finance non-prime customers.  The demand for vehicles is still strong and growing, at least in this segment.  But the supply of financing has stalled.  More and more people are now suddenly unqualified to buy late-model and new vehicles at least at terms that cover up huge equity deficits and still provide a dealer a modest profit margin. 

As a result, the special finance customer is again becoming an unwanted entity in the marketplace and only those dealers who have the “know how,” ability (lending strength), and desire will be able to offer viable choices that actually satisfy their needs.   Special finance dealers will soon have a more captive customer once again.   However, this time around, these astute dealers have learned to master the fundamentals of finance and the art of customer service.  They fully understand what every good buy-here-pay-here dealer has known for years:   You can build a very lucrative business around the Special Finance customer with a good lending source and a lot of common sense

How tough new laws on resolving personal debts are burning lenders—not just cash-strapped Americans

by Jessica Silver-Greenberg of Business Week

The latest lesson for lenders from the housing crisis: Be careful what you wish for. Banks and other financial outfits spent eight years and $40 million lobbying for sweeping new bankruptcy rules that would limit their losses from deadbeat debtors. But it turns out those changes, enacted in 2005, are forcing more troubled borrowers to walk away from their homes—even those who didn’t take on risky mortgages in the first place. And that’s bad news for lenders, which suffer financially every time they have to take a troubled property on their books.

Before the new rules kicked in, many consumers could find debt relief—and keep their homes—by filing for bankruptcy protection. Now the process is much more onerous and expensive and the benefits more limited, making foreclosure seem appealing by comparison. A July paper by David Bernstein, a researcher at the U.S. Treasury, found that 800,000 fewer homeowners have filed for bankruptcy since the rules kicked in. A quarter of those people, says the report, have likely had to give up their homes as a result—boosting foreclosures nationwide at least 4%. “[The rules] are directly responsible for the rising foreclosure rate,” notes another report by investment bank Credit Suisse (CSR). Counters Philip Corwin, counsel at the trade group American Bankers Assn.: “These studies don’t stand up to scrutiny.”

Banks and other lenders probably never imagined such an outcome when they pushed for changes to bankruptcy rules. The courts were clogged, the industry argued, with consumers looking for any easy out from bills they could pay. As a deterrent, companies wanted to raise the bankruptcy bar.

They got what they wanted. Previously, anybody could file for Chapter 7, the quick and cheap proceedings that liquidate financial assets but not the home to cover debts and dismiss unpaid bills. Now only low-income borrowers qualify, and Chapter 7 doesn’t stave off foreclosure

ONLY TEMPORARY RESPITE

As a result, many struggling borrowers have no other option but Chapter 13, which requires that people follow a court-mandated repayment plan for all their debts, including medical, credit-card, and other bills typically discharged under Chapter 7. Going the Chapter 13 route can halt a foreclosure already in process. But that’s often only a temporary salve, since other debts aren’t eliminated, and banks can resume foreclosure proceedings as soon as the payments begin to slip anew. Says Chicago bankruptcy lawyer David P. Leibowitz: “In some cases, bankruptcy has become so onerous that it’s not worth it to save the house.”

The pain of foreclosures, of course, isn’t limited to the people losing their homes. A single foreclosure cuts the value of nearby homes by an average of $1,508 nationwide, according to a report by the Joint Economic Committee of Congress (JECC). Lenders, too, are feeling the bite. Financial firms, the JECC found, take a $50,000 hit on each property they inherit via foreclosure. That weighs on earnings and limits their ability to make fresh loans.

Cases such as Yvonne Reina’s will mean more pain for everyone on the housing food chain. Reina hoped to keep her duplex in suburban Chicago by filing for bankruptcy. The 54-year-old claims processor fell behind on her mortgage payments after a knee injury left her unable to work. She consulted a lawyer about declaring Chapter 13. But he advised against it, saying the payment plan would be too burdensome, given her limited income. In March the bank foreclosed, and Reina moved into an apartment. Says Reina: “I just couldn’t make it work anymore.”

Silver-Greenberg is a reporter for BusinessWeek.com.

The Full Spectrum Solution to Lost Sales

There has been tremendous change throughout the auto industry over the last year to say the least, and from all indications, it doesn’t look like the dust is going to settle any time soon.   The best way for me to describe automotive financing today and in particular, Special Financing, is to compare it to 1980 when the choices for consumers with credit problems were much more limited than they were the first half of 2008.  There were local banks, a few specialized lenders, and buy here pay here.  That was pretty much all we had.  Now in reality it may not be that bad but it sure feels like it.  Since the summer of 2008, we have lost more than 40% of our ability to finance automotive consumers.

Dealerships throughout the country are struggling to finance customers with a credit score below 550 today, the fastest growing segment of the industry.  It is very difficult to find deals in this “no man’s land” of lending and when the dealer finally gets one, the customer has no money for a down payment.  This is a common theme all across the country – dealers have plenty of customers with poor credit and no money down.  And the bottom line result is no deal.  More and more customers are leaving dealerships via public transportation than in newly purchased vehicles.

The solution to this magnanimous problem for dealers lies in one of the Key Fundamentals of Special Finance – Full Spectrum Finance.   Full spectrum financing is an absolute necessity for car dealers today.  It affords them the ability to offer vehicle purchasing options to every customer who visits the store, regardless of their credit and with less emphasis on down payment.  It removes an important limiting factor from the typical sales process and if done correctly, will help dealerships build customers for life by making financing as simple, seamless, and as profitable as possible.

Full spectrum financing covers the full spectrum of consumer credit scenarios.  Over the past six months we’ve had to add a new tier to our Credit Pyramid that depicts this spectrum– The No Man’s land between a 550 and a 520 FICO score.  We did so in order to better explain the market today (Refer to Figure 1).   Most dealers have no problems financing customers with a 550 score or better.   It’s this third tier however that presents the most problems.  It is the one that’s growing the fastest due to the recent credit crisis, but it’s also the one that lenders are shying away from.  And, at the same time, it is one tier where customers aren’t quite ready to accept a buy here pay here loan.   

The prime tier is easy.  It’s not hard to find good lenders to finance prime customers.  In the near prime tier you will still find competitive lenders who are large and progressive and may even buy down into the upper echelon of the third tier.  Small regional banks and local credit unions are great options to have in your repertoire especially if you build strong, profitable relationships with them.  You will find them to be strong business allies that are in it for the long haul.

Like I said earlier the third tier is a whole different story lately.  This is a segment of the business where we really have to rethink our game plan and may even have to take an entirely different approach to sales and finance.   HSBC is out.  Triad is only servicing loans.  Wells Fargo recently bought Wachovia and no longer offers indirect lending.  Americredit has struggled for quite awhile securing capital and managing growth.   And as a result, Capital One is tightening their belt since they have unintentionally doubled their market share.  All in all, we have lost over 40% of our financing ability in the industry and the majority of that loss occurred in this third tier where the recent credit crisis has forced a large percentage of the population.

In order to be effectively finance customers in this new third tier of the credit pyramid, we have to take a closer look at the Four P’s of business:

·         People – A dealer’s staff must be proficient at finance with a thorough working knowledge of every lender’s program that operates in this tier.  The staff must be adequately trained in a sales approach that effectively develops the customer’s real need early and focuses the sale away from specific vehicles.   Every member of the team must be held accountable for generating results.  There is neither time nor room for a freelance sales approach, particularly with this tier of customer.

·         Process – A strict adherence to a proven “Road to the Sale” can save even the weakest of teams.  The sales and finance process are intertwined in special finance, particularly in this third tier, and your procedures should be second nature to every member of the team. 

·         Product – Your inventory will make or break your deals.  The days of 84 month terms and 150% LTV loans are gone.  That’s why I strongly urge you to buy and maintain a 45 day supply of inventory for this tier with an ACV between $5,000 to $7,500 and at least a $1,000 spread behind book, mileage between 50K and 75K, and an age of no more than five model years old.  Anyone saying you can’t find these vehicles is simply wrong.  Call me and I will put you into contact with dealers in several States who can help you.  Remember to purchase your inventory by considering your financing options on the lot.  I recommend that you factor a $1,200 down payment, 48 – 60 month terms, your State usury rate for interest, and a lean,” safety only” reconditioning policy.  This will help ensure that you maintain an adequate supply of inventory for the credit tier of highest demand.

·         Promotion – You don’t have to spend a lot of money advertising for customers in this tier.  If you’re like most other dealerships, you already have plenty of customers who fall into this category of financing and my primary focus would be to concentrate on these existing customers first.  You can waste a lot of time and money trying to force a market that is not ready to buy.  My advice is to purchase and manage good sales leads until you can develop the ability to generate them on your own and, demand in the first and second tiers returns. 

The forth tier, custom finance, is where most dealers fall short.  Even dealers who have been involved in special finance for several years tend to ignore this category of financing either out of fear, or from a lack of understanding.  Whatever the reasons, they just don’t seem to have the stomach for the buy here pay here class of customer.  To me any dealer who is not actively engaged with their own Related Finance Company (RFC) or BHPH operation is missing an incredible opportunity for sales and profits that can be an integral part of their business.

There are several very strong lending sources who are experts at this level of financing and collections if you choose not to tote the note yourself.  Credit Acceptance Corporation, Westlake Financial, Western Funding Inc (WFI), Drive Financial, and sub-prime auto leasing companies like Auto Trakk are all great business partners that are thriving right now and can help you sell more customers by expanding your spectrum of financing.  They will give you the ability to finance buyers in both the third and forth tiers of the credit spectrum.

Dealing with change is not optional.  We have to be tactically minded and proactive in our thinking; we must meet the needs of the consumer by understanding the market and offering solutions that work.  Full Spectrum financing allows a dealership the ability to sell more cars to more people, and evolve with the demands of the market. 

Download The Full Spectrum Solution to Lost Sales

Posted by Marcie Belles on January 7, 2009 at 1:30pm with Auto Finance News

FICO 2008 to Begin in Spring

(Excerpt from myfreecredittuneup.com)

The company that cooks up credit scores for millions of Americans is changing its recipe — and that could affect how easily you get credit in the future.  Fair Isaac Corp., maker of the popular FICO credit score used by most lenders, says its new scoring model will do a better job predicting the likelihood of a borrower defaulting on a loan. For one thing, the new model, dubbed FICO 08, will be more forgiving of occasional slips by consumers, but will take a harder line on repeat offenders. Fair Isaac predicts its new system will help lenders reduce default rates on their consumer credit by between 5% and 15%.

 The rollout of the new credit-scoring system comes at a time when lenders say they are eager for more-accurate measures of credit risk, in part because of rising loan defaults as subprime mortgages go bad and housing prices fall. And there are signs that delinquencies are creeping into other types of consumer debt, including auto loans, further prompting lenders to tighten up on credit.

 The FICO score, which Fair Isaac says is used by 90% of the 100 largest banks, and other similar scores hold sway over the lives of millions of people. Financial institutions use them to determine the granting and pricing of credit, insurance, cellphone usage and, in some cases, employment and utility services. Some consumer groups have raised concerns about whether credit scores are being used properly and whether they are valid measures of credit risk for some groups of consumers, especially minorities and lower-income individuals, says Travis Plunkett, the legislative director for the Consumer Federation of America. 

 Credit scores, which are calculated using proprietary models, also are criticized for a lack of transparency. “This is a product, per se, but it’s a product that has inordinate influence on the financial lives of hundreds of millions of Americans,” says Mr. Plunkett. Fair Isaac, based in Minneapolis, says it believes it does a good job of explaining the factors that go into calculating the FICO score and in guiding consumers on how to manage their scores.  Consumers could start seeing the new FICO scores by the spring, though some lenders may take additional time to test the system to see how it works with their business and loan portfolios.

 Fair Isaac, which last revamped its scoring model earlier this decade, says it is accelerating its FICO 08 rollout, partly in response to lenders’ demand for better risk-management tools. The latest version of the FICO score will largely look and feel the same to consumers and lenders.  Scores will still range from 300 to 850 — the higher the better — and the model will continue to look at the same factors, including consumers’ level of credit indebtedness and payment histories, length of credit histories, number of recent credit openings and inquiries, and the type of credit used, to determine scores.  But the new model will more finely slice and dice the information in consumers’ credit files to do a better job of separating the “good risks” from the “bad risks,” particularly for subprime borrowers; those with “thin,” or young, credit files; or consumers who are actively seeking new credit. “Those are the communities that lenders are most interested in” to determine credit risk, says Craig Watts, spokesman for Fair Isaac. 

 “Consumers who are low risk will score better with the new FICO version, and consumers who are high risk will score lower,” says John Ulzheimer, president of consumer education for Credit.com, a personal-finance Web site. Higher-risk borrowers may find it tougher to get credit, while those with less-risky profiles — though they may have gotten approved for credit accounts in the past — will start to get better deals from lenders, he says.  Two people with the same FICO score currently could see their scores diverge under the new system.  One possible reason: FICO 08 gives more points to consumers who maintain a variety of credit types, such as credit cards, a mortgage and auto loan, because it shows they can manage payments on different kinds of loans. On the other hand, the new scoring system penalizes to a greater degree borrowers who use a high percentage of their available credit.

FICO 08 also will draw greater distinctions among different borrowers who are at least 90 days late in making a loan payment, known as a serious delinquency. Traditionally, many credit-scoring models grouped subprime consumers into one general category. But Fair Isaac says its new model will give a higher score to a borrower in arrears if they also have a number of other credit accounts in good standing. Conversely, a person’s score could drop if he or she has multiple delinquent accounts.  “Overall, more consumers will see their FICO scores go up slightly than will see their scores drop,” says Tom Quinn, vice president of global scoring solutions for Fair Isaac.

Despite the new scoring model, consumers still have to make sure the information in their credit reports, which Fair Isaac relies on to come up with its score, is accurate. If consumers feel their FICO score is unfair, they would have to go to the individual credit bureaus, Experian Group Ltd., TransUnion LLC and Equifax Inc., for a copy of their credit report on file and look for any errors or missing information. If there are any, they would have to contact the credit bureau or the financial institutions to dispute those errors.

FICO 08 also aims to curtail the growing business of allowing people to polish their credit by “piggybacking” on someone else’s good credit history. In recent years, credit-repair Web sites have sprung up that arrange for subprime consumers to boost their scores by becoming authorized users on accounts held by strangers with better credit. When scoring a consumer, FICO 08 won’t take into consideration credit-card accounts for which that person is an authorized user. But the move also will hurt legitimate users: People who give a credit card to a child or a spouse as an authorized user to help boost their credit score.

FICO 08 is likely to face some competition from VantageScore Solutions LLC of Stamford, Conn., a joint venture of the three credit bureaus that was rolled out in 2006. Fair Isaac has sued VantageScore and the three bureaus, accusing them of using unfair and anticompetitive practices to harm the FICO brand. Recently, Equifax linked the suit with the launch of FICO 08. The company has said it wouldn’t move forward with FICO 08 and that its relationship with Fair Isaac remains “strained” until the lawsuit is resolved, says David Rubinger, Equifax spokesman. The new FICO model has already been distributed to Experian, which is in the process of implementing it, while TransUnion expects to have the scoring model available for lenders to test during the second quarter of 2008. Fair Isaac says its intention is to provide the formula to all three credit-reporting agencies.

5 Key Strategies for Improving

Your Sales, Profits and Performance

We’ve been getting a lot of calls and emails from dealers and managers lately to discuss the economy.  Many ask “how bad is it, really?”  Others ask how long will this nightmare continue, while some just seem to want to debate that this is the worst it’s ever been, like it’s the end of the world as we know it.  Tom, c’mon!  You can’t tell me that it’s NOT different this time.  Well actually, I can.  It’s not different.  We have seen this before.

This is the fourth recession since I first started in the car business wholesaling to dealers and retailing on a small corner lot to pay for college.  During my first recession the headlines read “The Nation has entered the most severe recession since the Great Depression,” “Investors are running scared from stocks…waiting for the bloodbath to end.”  “The tightening of the money supply has resulted in sky high interest rates (20%) and 11% unemployment…”  Sound familiar?  Well, that was then, not now.  The year was 1982, the beginning of the Reagan era, and since I had no real basis for comparison, it was all I knew about the business and it was when I first learned about Automotive Special Finance.  However, back then we referred to it as Buy-Here-Pay-Here.

We have amazingly short memories in this country and that’s probably why history tends to repeat itself.  A recession is a naturally occurring event in a capitalistic society, regardless of the debatable causes.  It is an event whereby the weak and inefficient are weeded out.  And, in reality, there is always a tremendous recovery period that has followed every recession, including the Great Depression.  The challenge is to evolve quickly enough to survive the down turn and then be in a position to take full advantage of the prosperity during the economic recovery.

Yes, we are losing businesses at an alarming rate.  There are manufacturers, dealers, lenders, and vendors who may not make it.  And if you only listen to the doomsday headlines and recurring hyperbole, you might as well close up shop and quit too.  But, if you focus on the fundamentals of your business and work smartly and tenaciously to become one of the majorities who do survive, you can poise yourself to be ready for recovery.  And, people get rich during an economic recovery. 

Below are 5 key strategies for improving your sales, profits and performance that can help you position your business to expand, capture market share and truly benefit when the economy turns.

Strategy #1:  Planning

The first and most basic strategy is to build a sound plan.  A business plan is your roadmap.  It is how you drive the future of your business. It focuses the joint actions and thoughts of the team toward a realistic and achievable goal in which all of the forces affecting your business model are taken into consideration.  The plan lays out targets in all major areas of your business: sales, expense items, hiring positions and financing goals.

So whenever you write, “We expect 500 customers and 100 sales per month by the end of year one”, it’s not just a passive prediction where you open the doors and wait for customers to show up.  It is an educated, well thought out and factual prediction based on the current and future market conditions that challenges your sales force to reach a specific, targeted goal with allocated resources. 

 The basic purpose of any business plan is to identify and evaluate the external opportunities and threats to the business, it forces you to review everything at once: your “value proposition” (why people should pay you money), marketing assumptions, advertising, operations, financial planning and staffing and ties together all the disciplines of business - Operations, Management, Accounting, Finance, Marketing and Economics. 

Strategy #2:  Teamwork

Once you’ve written your plan, even if it’s handwritten, you’ve laid the groundwork for what your team needs to accomplish in order to achieve the stated goals and be successful.  You have your game plan, now you have to develop your team and execute the plan.

I have highlighted a few of the fundamentals for effective teamwork you can use as a foundation:

• Common Focus and Purpose - Every team needs a purpose!  Even if the purpose is obvious, it needs to be clearly defined and progress toward it needs to be measured daily.  Without clarity in your company’s vision, your team can easily become lost, lose their focus and discipline, and become victims of the weapons of mass distraction.
• Define the Team and the Positions - Just as the team has a purpose, each member has a role.  Everyone must know how the team functions, who does what and when they are to do it.  Every military unit and sports team practices their game plan with a clear understanding of the purpose of the team, their mission to accomplish, as well as the functionality of each position.  They understand the “bigger picture” and their role within it.
• Clearly Written Job Descriptions -  Members of a team must know exactly what is expected of them.  They must know what to do, how to do it, and why it is done this way.  A clearly written job description that is free of ambiguity is the first step to effective training.
• Performance Standards and Periodic Reviews - The second step to effective training is the unbiased, objective report card.  Imagine what the academic performance of teenagers would be if we eliminated report cards in school.  The same holds true for employees, athletes, and soldiers who are not graded objectively.  You should establish and maintain minimum performance standards and conduct periodic and routine performance reviews.  Remember, these are minimum standards so don’t be weak.  Hold your position and eliminate any and all excuses.
• Communication - One of the common pitfalls of any relationship between people is a failure to communicate.  The same holds true for teams; it is a pillar for the success of any team.  Although the tone must remain respectful and constructive, effective communication is not always nice.  Team members must be willing to speak candidly and be brutally honest with one another in order to improve performance.
• Trust - Trust is the fiber that holds any team together and each member must freely give and receive the following types:
  • Communication Trust - There is no room for the “I’ve got a secret” games and a team is no place for liars.
  • Capability Trust - Every member must trust in each other’s abilities to perform their jobs and they must trust you and your abilities to perform yours.  
  • Contractual Trust - Just like a written contract, the “word” among team members is their common bond.  This is the enactment of the ole “say what you mean and mean what you say” mantra.  Team members keep their word, especially to one another.
• Core Values - Every team must have core values.  They are the standards of behavior that all members must adhere to remain a member.  They are the only elements of a team that never change.

Strategy #3:  Processes

Special finance is about attracting customers, understanding their vehicle needs, effectively pre-screening the prospect’s buying power (ie: their credit), and presenting a selection of vehicles you can sell and finance for a profit.  It involves a very specific process and your success will be determined by the collective talent and efficiency of your team to do so with every customer, with every deal and without exception. 

A clearly defined sales process is your “road to the sale” and a strict adherence to it is the best way to avoid the common pitfalls of inexperienced dealers across the country.  If you implement a detailed and consistent “Road to the Sale” and execute it every time, you will find that your team will understand your sales processes and improve their execution with every sale.  Your sales ratios will increase along with the gross profit of every deal.  We are all creatures of habit and the more we do something, the better we become at doing it; the more we understand, and the more confident we become as a team.

Strategy #4:  Metrics

Numbers never lie!  They always tell a story.  And, if you can understand the language in which they are written you will have a wealth of information about your business, how it’s performing, and you will know exactly what you need to improve sales and/or profits.  Knowing the metrics for your dealership is a critical fundamental for success.

If you don’t effectively manage the metrics of your business and follow a set process for executing operations, prospective customers and sales leads are easily wasted and the returns on your investments will be squandered.  The difference between a 10:1 return on investment and a 3:1 return is most often due to process. But if you’re not effectively tracking and managing the metrics, you have no real awareness of your inefficiencies and no idea of what is needed in order to improve sales or profitability.

Strategy #5:  Leadership

I believe that the key future trend for producing world-class standards in sales depends on our ability to effectively develop and lead a team.  True sales leadership is achieved when sales managers are equipped with the resources, competence and motivation to accept the responsibility for developing, training, and leading their own sales teams.  Without sales leadership fundamentals, sales training is likely to be off course group frustration sessions born out of desperation to ‘hit that monthly target’ using spiffs and bonuses rather than a sustainable planned approach that actually generates results. 

The primary responsibility of a sales leader is to develop the power to achieve high performance from a trained, focused, and unified team.   A high performance team requires high performance leadership that elicits the active involvement of everyone - no matter what role a person plays in the overall process; every team member knows and believes they are important to the success of the overall mission.  The primary goal is always to get everyone working to their highest level of ability, because “the power of the team rests within its members.  The power of the members rests within the team.”

Mr. Tom Herald is a Professional Consultant and National Trainer and with Benjamin Herald Associates.  He has over twenty years of experience in the automobile business and ten years as a dealer principal.  He is a former Air Force Commander with extensive training as a leader and instructor.  He is one of the top experts on Special Finance and can be reached at tom@heraldassociates.com or by phone 859.816.7990