Dale Pollak is an auto-retailing innovator, so many people wondered what he might say to a room full of lenders at the American Financial Services Assn.’s vehicle-financing conference in Orlando.
It didn’t take long to find out. And it created a stir.
Pollak made the case that technology could better determine retail values by sampling actual prices posted on dealer pre-owned inventory in each market.
It then followed, based on his reasoning, that wholesale and loan values could then be established by calculating backwards from the market-driven retail price.
He asked his audience, “Wouldn’t it make more sense to lend based on actual market numbers rather than the theoretical numbers provided by the guidebooks?”
Pollak was referring to and taking issue with the likes of Kelley Blue Book, Black Book and the National Automobile Dealers Assn.’s guide.
Those organizations use much different value-setting methods than what Pollak proposes. Adding to the intrigue is the fact that Pollak’s company, vAuto, is under the same Cox Enterprises/AutoTrader corporate ownership as Kelley and Manheim, a remarketing firm that publishes the Manheim Market Report, a commonly used appraisal source for dealers.
During a Q&A after Pollak’s provocative presentation, Mike Stanton, vice president and chief operating officer of NADA Used Car Guide took the microphone.
Clearly irritated at having his business publicly assailed by a partner of NADA University, Stanton asserted Pollak misrepresented the methodology used on the sixth floor of NADA headquarters, where the trade group’s guide-book staff crunches valuation numbers.
An uncomfortable hush filled the room as the discussion unfolded.
Pollak reiterated the idea that the lending industry should be open to new ways of thinking about lending, challenging the reliance on guidebooks.
At least that’s how Stanton took it. Later, I talked to Tom Cross, CEO of Black Book, who feels the same way. Most conference attendees left the issue alone, seemingly because of the tension in the room.
In a later conversation with me, Stanton itemized a number of potential problems with Pollak’s new concept. He says all possible vehicles are not necessarily available for sale in a given market at any single point in time to provide consistent retail pricing.
In other words, single markets do not always provide enough units of each example to be statistically relevant.
Then there is the issue of price sampling inventory with inconsistent mileage. In addition, lenders need a certain “smoothing” in the values they depend on to make lending decisions as value volatility can be unnerving.
To be sure, NADA in particular, has improved its methodology in recent years after dealer margins were pinched when the relationship between actual wholesale values and retail values was not accurately reflected. That happened when used-car demand outpaced supply, causing auction prices to skyrocket in 2009.
It is easy to imagine that the participants in the conference confrontation would have preferred that it had unfolded in a different, less-public forum.
But the genie is out of the bottle. It will be interesting to see if this discussion has legs. There is a lot at stake.
Here’s my take:
Lenders make capital loans based on balance sheets. But average retail value and loan value on vehicle-finance contracts have completely different purposes.
Some people may disagree, but capital lending is similar to dealership valuation in a buy-sell situation or when a lender is making a dealership capital loan. Individual auto lending is more broadly stroked and should be looked at as a portfolio.
David Ruggles is an auto consultant and former dealership general manager. He can be reached at [email protected].
