Special finance lenders found themselves walking a minefield two years ago when the market turned ugly after looking so good.

The resulting carnage left the industry bloodied and stunned.

"It was really a sad time," recalls Jim Bass, founder of Auto One Acceptance Corp. "A lot of bankers in my office were offering $100 million credit lines and good terms. That ended, and phone calls stopped being returned."

Things had looked good from 1991-94. Loan losses to people with spotty credit were a record low at 4.5%.

That attracted the eye of many lenders who, with capital in hand, rushed into the bustling special finance market.

A lot of lending companies went public. The loans flowed freely. Too freely.

It was not unusual for some dealers to work with 20 lenders, says Mr. Bass. The dealers would blast faxes and wait for the best price to come in.

Under such pitched competition, the lenders made bad loans. The default rate skyrocketed.

Says Mr. Bass, "It led to a lot of lenders consolidating. A whole bunch went bankrupt. A lot of people just closed their doors."

Now the special finance market has regained its footing - and its senses.

"It's alive and well," Mr. Bass tells NCM Associates' National Conference on Special Finance in Las Vegas. "There's much more responsible pricing and underwriting. It's better tailored to dealerships."

Of the 60 million new and used cars sold annually in the U.S., about 27.5 million are financed by loans which are non-prime (levels B through C) and sub-prime (D on down), he says.

For that lending market to stay healthy, it needs more initial public offerings (IPOs), according to Mr. Bass.

He says a big industry development is Ford Credit Co.'s special financing subsidiary, Fairlane Credit LCC, purchasing Triad Financial Corp. of Huntington Beach, CA, this year.

That's significant because it means Ford, through Triad, will be doing non-prime financing with non-Ford dealerships.

"If the 'captive' lenders decide to take over the market, they have the wherewithal to do whatever they want," says Mr. Bass. "But some dealers will resist being told where they should do their business, and a lot of independent lenders will be out there to take up the slack."

In the old days, lenders relied a lot on intuition when deciding who should or shouldn't get an auto loan.

Some of that guess work bordered on goofy. For instance, one old rule of thumb was to never finance a "P" person, says lender Jim Bass.

He explains, "That meant turning down an auto loan application from anyone whose profession started with a 'P' - police, preachers, painters, pimps, etc."

Even an experienced loan manager, deciding who's a good credit risk based on what he's been taught by old hats, often misses the mark, according to Mr. Bass who's originated more than $1 billion in auto laons.

Such gut feelings have been replaced by loan scorecarding, a system using computer technology to process car loan applications.

"The laws of science and statistics are working for you with good scorecards," says Mr. Bass, founder of Auto One Acceptance Corp. and a keynote speaker at NCM Associates' National Conference of Special Finance in Las Vegas.

A growing number of loan companies use scorecards to screen auto loans. In that data base are hundreds of thousands of non-prime loans that were successfully paid off, thereby contributing to the development of good scorecards, says Mr. Bass.

Ironically, some loan application information, which might at first glance look bad, can often pass the scorecard criteria.

"With scorecarding, some things you would previously accept, you don't now - and vice versa," says Mr. Bass.

That's because most of what's used in scorecard models doesn't come off the loan applications, he says. Instead, the more important information comes from credit bureau data banks.

"Buyers' credit histories are very important," says Mr. Bass, who is launching a new enterprise, autoeloan.com Inc.

Scorecarding creates efficient loan rate tiers as well as "whittles away the bad and gets into the gray areas of sub-prime and non-prime," says Mr. Bass.

Some dealers attending the special financing conference say they're miffed because lending companies refuse to tell them the mechanics of the scorecard system.

Says Mr. Bass, "It's all pretty proprietary. The statistics are guarded carefully because otherwise it would prejudice the results. And you don't want a loan officer trying to work around the scoring."

Both Ford Credit and GMAC posted small gains in net earnings last year, with the latter's total surpassing the Ford subsidiary's by a narrow margin.

GMAC reported 1998 income of $1.32 billion and Ford Credit, $1.08 billion. Comparative 1997 income totals were $1.30 billion at GMAC and $1.03 billion at Ford Credit.

Ford Credit Chairman and CEO Philippe Paillart says 1998 earnings rose "only" 5% compared to a 10% growth target.

He attributes that in part to increased depreciation expenses for leased vehicles. This cost, reflecting overinflated residual values, rose from $6.19 billion in 1997 to $7.33 billion last year.

But he notes fourth quarter earnings at Ford Credit rose 7%, signaling a potential meeting of the 10% growth goal in 1999.

At GM, depreciation resulting from finance and insurance operations declined to $4.50 billion from $5.90 billion. GM took a $500 million charge in 1997 for losses on off-lease vehicles because forecasted values of cars coming off-lease were overestimated compared to actual market prices.

The subprime lending market has its risks. Even riskier are "buy-here/pay-here" financing contracts.

But subprime opportunities are too good to avoid as more and more consumers fall from the prime lending class.

That's the word from veteran dealer CPA Carl Woodward, of Bloomington, IL. He says the special finance market for new and used vehicles could grow as much as 40% in some markets.

Repossession rates as high as 35% on "pay-here" dealer-finance loans and nearly 20% on subprime contracts fuel the horror stories.

But that shouldn't frighten dealers away from subprime, states Mr. Woodward.

Those who hold back limit their sales opportunities. "And market shares in new and used cars and trucks will shrink."

Repossession loss concerns should be weighed against the fact that reclaimed vehicles that are resold either by the dealer or the financing institution reduce the bottom-line loss to the 8% -15% range, says Mr. Woodward.

He adds that subprime financing providers and dealers specializing in that sector are seeking a formula that could lower the large repo rate and resultant write-offs now troubling the area.