Lending Shifts to Small Banks

“Think small” may be the new mantra for auto dealers hooking up with lenders other than giant banks.

“We're seeing a shift towards more localized, decentralized lenders,” says Mike Kane, senior vice president-client services for CitiFinancial Auto.

Some large banks are reeling from the current credit crisis, brought on by dubious lending practices and securitization run amok. Banking losses totaled $26.2 billion in 2008's last quarter, according to the Federal Deposit Insurance Corp. “We put too much in too few pools,” Kane says.

The mega-banks have retrenched and aren't lending like they did before.

Regional lenders see an opening, as they look to build new relationships and enhance existing ones with auto dealers, many of whom are desperately seeking financing for their customers and their own floorplan needs.

Smaller lending institutions doing business regionally, rather than nationally, “can provide very hands-on, high-touch personal service,” Kane says.

Big banks had trouble with that because of their huge loan portfolios. The result was too many questionable loans and not enough collection-department resources to get the money back.

“The servicing platforms for big lenders weren't built to sustain the stresses we're seeing today,” says Kane at a recent Auto Finance Summit in Las Vegas. “In that regard, smaller, service-oriented firms are in better shape.”

“As a small lender, we get to work with dealers more closely,” says Michael Ritter, president and CEO of Flagship Credit Corp. based in Chadds Ford, PA. “We'll rehash deals and come up with unique lending solutions, if necessary.”

Jonathon Levin finds himself in a similar situation as president and CEO of Turner Acceptance Corp. in Chicago.

“Being smaller, we have the luxury of being able to communicate on every single deal,” he says. “We've taken it a step further. We found value in sending a finance officer to dealerships to teach them how to structure deals better.”

Flagship is doing likewise. “Our analysts are calling on dealerships, essentially saying, ‘Here we are, here's a face to go with that voice on the other end of the line,’” Ritter says.

Open lines of communications between dealers and lenders are essential today, Levin says.

“As we tighten up and increase pricing, we want dealers to understand what is going on,” he says. “We need to convey that to them. Our uniform message is, ‘We're here for you and some changes are necessary so we can continue these great services.’”

Yet, some lenders who offered dealers superb service still became victims of hard times, says Scott Vickery, finance director at Cardinaleway Mazda in Mesa, AZ. Twenty-five banking institutions closed last year, and 76 others are on an FDIC “troubled” list.

“My main lender of several years is no longer in business,” he says. “I knew I could pick up the phone and rehash (an automated) system turn-down with them. It's not going to be like that anymore.”

Vickery has narrowed his relationships to “four or five lenders — and that's it.”

Levin says that's smart, because “it is better to have close relationships with a few, than distant relationships with several.”

The number of dealerships continues to shrink, notes Ritter. “There will be a lot fewer of them in four to five years. It becomes important for me to establish relations with some of them.”

Vickery looks for lenders that “want to be part of the family, so to speak. It's about taking the good, the bad and the ugly, and building a portfolio that performs.”

He lauds a return to “the old days of a decentralized firm serving a small area.”

In their quest for new lending sources, dealers also are turning more to community credit unions.

“As they lose lenders, dealers are saying, ‘Can we sign up with you?’” says David Jacobson, a former dealer who now heads GrooveCar, an online resource for credit union auto loans.

“A year ago, some dealers wouldn't give us the time of day,” he says. “Now, they are giving us loan applications from people with (high) credit scores.”

But Phoenix-area credit unions “took a major hit” because they too eagerly stepped up auto lending during the last few years, Vickery says. “They said, ‘Send us loan applications, we'll approve them.’ They got into trouble.”

Large or small, lenders “all are trying to find ways to bridge this gap of the stressed consumer,” Kane says. “We spend a lot of time trying to work out solutions to keep the person in the car.”

That includes amending loans by cutting interest rates or stretching the payment timetable to lower monthly payments.

“My advice, whether you're a dealer or a lender, is to get engaged,” Kane says. “Lenders shouldn't hide from dealers, and dealers need to work with lenders. That is the only way to solve the problem and rebuild the business models.”

Meanwhile, lenders that got burned in the credit meltdown are in self-analytic moods these days.

“They are asking themselves, ‘What are the mistakes we made?’” says Kane. “The second question is, ‘Will we make them again?’”