Back to the Niche Markets

Las Vegas — In recent years, auto financing firms widened their offerings, with traditional prime lenders venturing down to non-prime consumers, and subprime specialists reaching up to customers with better credit scores.

That trend has taken an abrupt U-turn on the rough road of today's credit crisis.

Auto lenders are steering away from their brief foray into full-spectrum lending, says Lou Loquasto, Wells Fargo Auto Finance's head of marketing and business development.

“A lot of non-captives were going for it, from subprime to super-prime, but there's been a pullback,” he says.

New companies often emerge during hard times, and the ones that may crop up soon “won't make the mistakes some of the existing firms made — you've got to know your niche,” says Michael Kane, a senior vice president of CitiFinancial Auto's Client Services Group.

“It's difficult to be all things to all people,” he says at an F&I Management and Technology conference here.

With credit tightening and consumer credit scores dropping, many lenders are shifting to the “quality end of the spectrum,” where people with higher credit scores present fewer risks, says Michael Wells, a group vice president of Toyota Financial Savings Bank.

“We're trying to stay the course and buy the spread of business,” he says. “But it's taken a lot of work, especially in the last 120 days.”

Scrambling to arrange financing for customers in the face of falling vehicle sales, dealers want lenders to understand their position, Wells says. “What we're hearing the most is: ‘Do you feel my pain?’ Sales being what they are, there's so much pressure on the back end.”

“It's important for dealers to understand where lenders are, and vice versa,” says Marguerite Watanabe, president of Connections Insights LCC, an automotive financing consultancy.

In the current economic state, “everyone is focused on the proper loan structure and the proper rate,” Wells says.

Dealers know it's not business as usual.

“They realize these deals require structure,” Wells says. “If you don't structure them right — getting the right person in the right car — you are not going to get the loan approved. Dealers understand that.”

It behooves dealers to care about the financial health of lenders, Loquasto says. “There are things dealers can do to help out lender profitability. When dealers don't do those things, lenders scale back and cut off those dealers.”

“There must be a real sense of partnership and ownership of customer portfolios,” Kane says. “The most difficult conversations I've had in the last few months are with dealers who say, ‘You are cutting me off because I'm not profitable enough for you?’

“We let that happen,” he says. “My advice to dealers is to get and stay engaged with four or five lenders.”

Kane says his small-volume subprime/non-prime enterprise went up the ladder to near-prime customers in an effort to expand its dealer-clientele base.

“But it wasn't as good as we thought it was going to be,” he says. “When the market popped 18 months ago, those customers went first. We learned a lesson. For us, the first to go wasn't the traditional subprime or non-prime customer.

“A company like ours now looks at capital as king,” he says. “Before, we looked at capital as unlimited. We want to reconnect with dealers in a niche, not as a full-spectrum lender.”

Assessing the causes of the nation's credit woes, Kane says there was not enough emphasis on risk management or on, “Does this make sense?”

“What has happened to Bear Stearns, Lehman Brothers, Freddie Mac and Fannie Mae boggles the mind,” says Alex Sarafian, director-consumer credit and risk management for GMAC North American Operations.

On the consumer side, “we're seeing deterioration at top credit tiers as well,” he says. “We're trying to buy as broadly and deeply as we can” he says. But there is a limit, and a fairly high one at that. GMAC has announced it will only approve loans to consumers with credit scores of at least 700 points.

GMAC's focus is on the “core business” during this down period, Sarafian says. “It doesn't make sense to spin your wheels with a bunch of new products. The market has made it hard for us and for dealers.”

Says Wells: “Because of the current market, we're looking for lender-dealer profit opportunities like never before.”