SAN FRANCISCO – How does an automotive lender make dealers happy these days?

“Very carefully,” replies Tom Wirth, president of U.S. Bancorp’s Indirect Dealer Group.

His answer reflects a current cautious mood of the auto-financing industry. It hasn’t been hit hard like its stunned home-mortgage counterpart. But it is dealing with tighter credit, higher risks and a weakened economy – all of which makes automotive lending trickier than ever.

“You won’t see in auto lending the excesses we’ve seen in the mortgage market,” says Andrew Fornarola, senior vice president, M&T Bank Corp. “But we are clearly dependent on the economy, and we’re going to feel it.”

Adding to the angst is that dealers and lenders are facing many would-be car buyers with a basketful of credit challenges.

Those can include diminished credit scores, maxed-out credit and negative equity on their current vehicles. It makes getting customers into a new vehicle tough for dealers, who are feeling their own pain.

“A lot of people are under personal pressure,” Adam Goldfein, a former dealer, says. “It pushes them into risk situations. If you understand this, you understand what dealers are going through.”

Vehicle sales are off, with the seasonally adjusted annual rate “dropping like a stone,” says Goldfein, who hosts a CBS radio automotive talk show. “There is less margin for dealers, less to walk away with.

“They are under a lot of pressure and they are going to be looking for new (finance and insurance) products for new revenue.”

Dealers also are trying to finance as many car deals as possible. In a year of fewer vehicle transactions, auto retailers are loath to lose a prospective sale because of financing problems.

That has led to greater risks and extended loan terms that are intended to make monthly payments more palatable, but instead are becoming an industry bane.

“Customers are having a tough time making ends meet,” Goldfein says. “These days, you never hear, ‘I have 10% or 20% for a down payment.’”

Now, it’s: “How many years can I have to pay off this car.” It has led to code-red 7- and 8-year auto loans.

“When I started in the business, the typical loan term was 36 months,” Goldfein says. “Forty-eight months was a stretch. Sixty months was, ‘Are you crazy?’

“Today, 60 is short, 72 is the norm and 84 and 96 are not uncommon. I’m waiting for (loan application software) to be reprogrammed for three digits.”

In 2003, 72- to 77-month terms accounted for 21.5% of auto loans and climbed to 39.8% through March of this year, according to the Power Information Network.

Five years ago, 84-to 89.9-month terms were almost unheard of, accounting for just 0.8% of auto loans. Now they are at 4.1%.

Longer loan terms are becoming so common “they’re not called ‘extended’ terms anymore; they’re the terms,” says Fornarola.

He and other lenders discussed market trends and industry concerns as panelists at the Consumer Bankers Assn.’s auto financing conference in San Francisco.

Long-term loans take car buyers out of the market for protracted periods, as well as increase the chances of loan defaults, a nasty situation for all concerned.

“It is amazing how nice people are when you are giving them money, and how mean they can be when you are dealing with them as a loan defaulter,” says Wirth, a conference panelist.

A near-certainty for long-term loans is that they ultimately result in negative equity, with the customer owing more on the vehicle than it is worth.

The No.1 question Goldfein gets asked on his call-in radio show is, ‘How do I deal with negative equity?”

Other common questions are: “Can I return my car? Can I refinance, because something has come up? If I voluntarily repossess my vehicle, can it ruin my credit?”

Yes, it can. But some consumers don’t care or are deeply ignorant of how credit worthiness works.

Goldfein tells of being at a dealership where a “regular-looking guy wearing nice clothes” got rejected for an auto loan because his credit score was abysmal.

“I asked him why,” Goldfein says. “He looked at me with a smile and said, ‘No one pays their bills.”

That cavalier attitude may be contagious.

“People call my show and say, ‘My credit sucks,’” Goldfein says. “And they

aren’t even embarrassed about it. That’s what gets me.”

Loan-risk models now take into account such changes in mind-set, Wirth says. “Before, bankruptcy was shameful. Now, people talk about it as a personal topic, and they talk about it in the suburbs.”

It has resulted in lenders insisting more than ever that dealerships get accurate and honest customer information for loan applications.

“Our attitude is trust but verify,” Wirth says. “A statement of income is not proof of income. It can be a statement of a lie.”

Subprime lenders check out everything on vehicle loan applications, says William Jensen, a senior vice president at Chase Automotive Finance.

“Verifying everything benefits everyone,” he says. “I don’t have to evaluate character because, being in subprime, all my customers are characters.”

Many of them have a 60-hour-a-week budget and a 30-hour-a-week income, he says. In other words, they spend more than they earn.

But there are loan risks today even if a dealership customer has a high score on the Fair and Issac Corp. (FICO) system that ranks creditworthiness from 300 to 900 points.

“If you believe every loan is going to do great because it has a 740 FICO score, you are kidding yourself,” says Nichaols Stanutz, senior vice president at Huntington Bancshares Inc.

A lot of prime customers are becoming stressed, Jensen says. “A lot of prime customers are becoming near-prime.”

Adds Fornarola: “Relying on FICO alone is a disaster. The anxiety is that models of today probably can’t work three or four years from now because of where the economy is headed.”

But there are positives and valuable lessons that can be learned from tough times.

“This cycle we are in gives us an opportunity to cure some things,” Jensen says. “It’s a reality check for everyone. A time of chaos is a chance to change.

“Cycles come and go. You learn from each and improve your business and eliminate the big mistakes.”

While sales volumes are important, it also is important not to fixate on volume, Stanutz says. “Volume is vanity and profit is sanity.”

Goldfein sees vehicle leasing as a solution to the problem of consumers entering into overextended loan agreements to obtain vehicles they really can’t afford to buy.

“Is leasing resurrecting Frankenstein?” he says, referring to leasing falling out of favor earlier this decade because of abuses and big losses.

He doesn’t think modern leasing is a monster. But when he suggests leasing to people as an alternative to buying a vehicle so they don’t get in too deep financially, “they’ll say, ‘No, no, no. I don’t like leasing.’

“My response is, ‘What’s wrong with leasing?’” Goldfein says. “It is beneficial if done right. Just because you tried something a long time ago, doesn’t mean you shouldn’t try it again.”