Captive Firms Buying Deeper

David Jones used to warn customers that if they failed to make their car payments, they'd no longer get credit.

“That's not true today,” says Jones, vice president-consumer credit, operations support and plans for General Motors Acceptance Corp.

Consumers with blemished credit histories that once precluded them from further financing “can get credit somewhere today,” he says.

They're a growing breed. About 40% of U.S. consumers are nonprime and subprime, according to Fair Isaac Corp., developers of the FICO credit scoring.

More lenders are offering near-prime, nonprime and subprime auto financing as those segments grow and more consumers find themselves with poor credit scores, due to circumstances ranging from life's vagaries to overspending.

Auto makers' captive finance companies are among lending institutions that are “buying deeper,” funding auto loans for consumers with low credit scores.

“There have been significant changes in the last 10 to 15 years on levels of credit,” Jones says.

Determining where a loan customer fits and helping borrowers with checkered pasts improve their credit performance, “is important to us,” he says. “It's critical that we be there.”

The subprime mortgage industry is a mess because of dubious lending practices. But subprime auto financing is in better shape, having gone through its own breakdown, rehabilitation and recovery.

Gone from that segment is the rampant high-risk lending behavior that led to waves of defaults and vehicle repossessions in the late 1990s.

Besides realizing there is a limit to how deep you can buy, special-finance lenders also learned the need to better oversee and educate borrowers to make sure they make their payments.

“It is important to manage near-prime, nonprime and subprime loans so they don't become casualties,” Jones says. “We want to keep those customers in the market.”

Anxious to move the metal, dealers often press lenders to approve auto loans for customers with credit issues. Lenders say that if they approve those loans, they expect dealers to send lower-risk prime-loan applications their way, too.

“We buy more nonprime and near-prime for dealers' customers than any one,” says Kelly Mankin, vice president-Chrysler Brands Marketing for DaimlerChrysler Services North America LLC. “But it has to be a balance; the dealer has to provide balance.”

While banks and other lending institutions focus strictly on the loan, captives are different. They hold a vested interest in facilitating car sales because of their affiliation with auto makers. That puts them in a unique position, says Mankin.

“The captives' role is to be there through thick and thin, not to cherry pick loans by FICO scores,” he says.

That can nudge them toward special financing even though “no one is going to get rich going after sub-prime,” says Mankin.

“Prime is the biggest (market), and I'd argue the most profitable, too,” he says during a panel discussion with Jones and other captive executives at the 2007 F&I Management and Technology conference in Las Vegas.

Todd Trese, marketing director at Ford Motor Credit Co., tells of a movement “to shift the balance to buy deeper” in response to a changing market.

Ford Credit is proceeding cautiously, in part because “you have rating agencies looking over your shoulder,” he says.

Captives always have bought “a full spread,” says Michael Groff, a group vice president at Toyota Financial Services Corp.

“But today we use better tools to rate credit and do a better job at pricing,” he says. “We're equipped to handle the ups and downs of the economy.”

Special financing offers captive lenders opportunities to help sell cars and profit from the loan terms, with much of that money filling parent company coffers.

“We're expected to make a lot of money in addition to helping sell as many cars as possible,” Jones says.

It can make for an ironic situation. A retired Chevrolet dealer recalls scratching his head at the paradox of GMAC making more money financing cars than General Motors Corp. made selling them.

Trese says Ford Credit has delivered $12 billion to Ford Motor Co. over the last four years, helping to bankroll product research and development and the like.

Besides keeping the auto makers happy, the captives must do the same for dealers who can direct their customers' auto-loan applications to various lenders.

In the face of increased competition, “we have been forced to be more keen about reacting to our dealers' needs,” Mankin says. “It's a 3-legged stool. If dealers, OEMs and captives are not working together, it won't work.”