Meeting of the Minds

LAS VEGAS — Auto dealers and lenders are getting to know each other better.

They had working relationships before. But because the recession and credit freeze dramatically have changed auto-financing standards, dealers and lenders now conduct face-to-face meetings to discuss what to expect of one another.

“It's never happened before,” says Richard Ackman, director-variable operations for the Germain Motor Co., an 8-store dealership group based in Columbus, OH.

Dealers and lenders meet to discuss topics such as loan-portfolio performances and point-by-point criteria for getting an auto deal financed under today's tighter lending standards.

“Lenders come to our F&I meetings to tell us their loan structures,” Ackman says at the 2010 F&I Management and Technology Conference here. “They'll say, ‘If you do this, we'll do that.’ We all want the same thing: to put a car deal together.”

That's harder to do now than a few years ago, but at least there's a thawing of the credit freeze that hit in 2008 like an ice storm.

“It takes more effort to put a deal together,” says Alex Sarafian, a risk director at Ally Financial.

With the easy credit that flowed before the freeze-up, car buyers often side-stepped low credit scores, bought too much car and received full financing with no money down.

That's changed. Now, lenders look hard, not only at credit scores, but also at debt-to-income ratios. They are tight-fisted towards consumers who shop vehicles that exceed their budgets. Hefty down payments now are orders of the day.

“We saw a dramatic shift with lenders,” Ackman says. “They instituted very stringent lending conditions. We started meeting with them, developing closer relationships.”

“We've gone back to basics with deal structures,” says Baruth, Toyota Financial Services' vice president-risk and dealer credit says. “Customer retention is important, but a repo is not retention. We need to have the customer pay us back.”

The credit crisis particularly hit auto sales because “we are the most credit-driven industry in the world,” says Andrew Koblenz, vice president and general counsel for the National Automobile Dealers Assn.

During the credit freeze, an estimated 1.2 million vehicles could have been sold but were not “because qualified buyers couldn't get financing,” he says. “Had there been (better credit conditions) a year ago, we could have avoided a lot.”

Some lenders were hit harder than others. General Motors Acceptance Corp. went from being a captive lender to an independent finance firm to a bank holding company with a new name, Ally Financial.

“We had to reinvent the company,” Sarafian says.

Toyota Financial Services survived the crisis relatively unscathed, but it was “an eye-opener” to see once-thriving dealers suddenly struggling and desperate, says Baruth.

Some Toyota dealers found themselves down to dealing with one lender: Toyota Financial.

“When you turn down a loan application and the dealer says, ‘You are the only one in the market to buy this deal,’ that's a strange feeling,” Baruth says.

Many dealers, who once had their pick of lenders, saw their options close up, says Marguerite Watanabe, president of Connection Insights LLC, an F&I consulting firm.

“They had multiple lenders before,” she says. “That was taken away. It now is coming back, to a degree.”

Ongoing dealer-lender meetings help the cause of mutual understanding, says Adam Pope, a vice president for Wells Fargo Dealer Services.

“We sit down with dealers and share their portfolio-performance information,” he says. “We show how their loans are doing. If they are sending us bad paper, we show them. That's important. We need to educate them on how we buy paper.”

Ackman finds such meetings helpful for his dealership group.

“We go over our portfolios monthly and they show us their yields and outline what our responsibilities are,” he says. “It works well for us. If a lender later balks at a deal, we can say, ‘But look at what our portfolio is doing.’”

It makes it easier when dealers “understand where lenders are coming from in structuring deals,” Watanabe says.

Lenders say they must face new realities.

“I was taught if you can't pay for your house, you can't pay for your car,” Baruth says. “But now we are seeing a lot of foreclosures, especially in California.”

For an automotive lender, he says, the question becomes: “How do we deal with those people and make money doing so?”

As the credit freeze continues to thaw out, competition among lenders increases, says Ally's Sarafin.

“We're definitely seeing more competition and we're trying to reach all credit spectrums,” he says. “But we're not back to where we were.”