Ponder, if you will, this question:

Were those who abandoned the subprime auto lending business during the past two years simply victims of spirited Yankee capitalism?

Or, did their departure reflect ominous structural problems that could someday engulf an entire sector?

In my view, it is unquestionably the latter.

Certainly, it is tempting to dismiss the shakeout that has occurred as natural attrition that ultimately will strengthen our realm. Yet, doing so, in fact, endangers our realm because it ignores two serious problems that we need to confront.

First, we need to halt forthwith the overly aggressive lending practices pursued in a frantic quest for market share. It is an irrational strategy that will produce legions of losers - but no winners.

Second, we need to accelerate our efforts to harness the nascent powers of e-commerce and, in turn, rid ourselves of anachronistic practices that pose additional threats to our future.

Ludicrous lending practices Our current lending practices may indeed continue to build impressive loan volume and suggest success. A more careful inspection, however, will unmask this prosperity as a short-term illusion. The ultimate outcome is apt to be outright failure.

At the heart of the problem is the cost of capital. If it's low - as it can be for a few deep-pocket companies - lenders can offer more products and accept more risk.

Unfortunately, a majority of competitors face higher capital costs; in turn, the loan products they offer are accompanied by far greater risk. After all, we typically lend money to customers who have identifiable credit problems in their past.

Yet, in an effort to garner volume and capture share, these lenders are accepting larger and larger risks, to the point that the rewards can not support them. The long-term viability simply isn't there.

It is this phenomenon that fueled the tremendous shake-out of the past two years. Too many lenders left the business because they couldn't continue to operate profitably. And, they have dragged this industry down to the lowest profit level of any I've ever been involved in. Yet, we continue to court danger.

Even what may appear to be successful - due strictly to loan volume - really isn't. For one thing, accounting techniques can bolster balance sheets. Moreover, problems don't surface overnight; it may take between 18 to 24 months to expose a bad five-year loan, for instance.

Somewhere down the road, these aggressive and irresponsible strategies will trigger turmoil. They're bound to, because too many margins are too thin.

Ideally, Wall Street analysts should be sounding an alarm. Yet while they have taken a few competitors to task after the fact, they have yet to displace the diligence the situation requires.

The sad irony is, we don't need to take such risks in the first place. Valued at $70 to $100 billion a year, the subprime auto market offers ample business opportunities for all of us as long as we build them on a more rationally priced basis for both risks and rewards.

As an example, you may currently offer a product that's not as attractive your competitors'. As a result, your share of this business is small. Still, you should not risk being unprofitable in the long term. If you're lending at rates that protect against the risk of loss, it is reasonable to offer 66- and 72-month auto loans. But too many lenders are not protected. Indeed, rates keep dropping.

This simply is not a rationale way to do business.

The failure to address capital costs triggers more trouble. Many lenders must first rely on traditional capital markets for funds, then carefully manage the funds at their disposal to help ensure their loan portfolios remain profitable.

Yet these markets are very cyclical, very rate-sensitive, and can do an about-face in the blink of an eye. Obviously, this, too, seriously impacts the cost of doing business.

That's why we all need to step back, and rethink the way we price our products, and rethink the very products we offer. As an industry, we're acting as if inexpensive capital and good times will last forever, that our loans will faithfully perform at profitable levels, and that short term market share gains will ensure long-term viability. They won't.

E-commerce beckons The cost of capital affects the second problem we face. That's the raw cost of operating our business.

Inherent in managing the "back end" of this business are certain needs: a quality staff, computer and telephone technology and support for that technology.

Electronic commerce offers untold opportunities to dramatically reduce these costs and help us better manage our business. Yet, the auto industry has barely begun to harness this potential.

For instance, some late 1999 data show that the cost of actually purchasing a car on the Internet was about 6% higher than the traditional method of visiting a dealer.

But the cost of buying the same car from a dealer was some measurable number lower if you first researched its cost on the Internet.

In other words, the Internet is an efficient way to educate the consumer. But it's not yet an efficient way of actually delivering the product.

This tells me there are huge opp-ortunities to dramatically improve efficiencies at the dealer level. Indeed, our single biggest operational bottleneck is the time we have to spend verifying the information that accompanies a credit application, and affirming that the car described is what is delivered. Collecting the required documents from a dealer can take anywhere from one day to two weeks.

The cumbersome, time-consuming manual methods that we are saddled with is an operational process that begs to be re-engineered. And the Internet is a likely tool for the task.

A year ago, National Auto Finance Company (NAFI) began developing an on-line application with a partner company, Internet Credit Services of Dallas, Texas. The vision was to set up Internet-linked kiosks at dealerships that would enable customers to send us credit application information once they selected their vehicles.

It's time to accelerate such initiatives. Given the benefits NAFI has found to date, it's well worth it. One e-commerce application enables approving or disapproving a loan in 25 seconds (with a dealership familiar with the process). Most spend anywhere from one to three hours on the same task. It needn't be this way.

Neither should we need to keep lending money in a manner that will lead us to oblivion.

Keith Stein is chairman and CEO of National Auto Finance Company, Inc., Jacksonville, FL, a specialized consumer finance company engaged in auto loans primarily originated by franchised automobile dealers for non-prime consumers.