By Kenneth Shilson, CPA

President/Founder

National Alliance of Buy Here, Pay Here Dealers (NABD)

Subprime Analytics

Although the year-end financial results for Buy Here Pay Here (BHPH) operators are still being compiled and individual results will vary, the NABD members I surveyed about 2013 performance indicated the following:

1) Unit sales for most operators were flat or declined (some by up to 25%) from 2012; due primarily to increased market competition from special finance sources that extended credit to BHPH customers. Individual operators were affected by varying levels of special finance competition in their local markets. Some operators expanded their facilities (added lots) to increase their market share. Market data indicated that the BHPH deep subprime financing market share declined by more than 20% in 2013, while the market share for subprime finance companies grew by a corresponding percentage.

2) Subprime finance lenders (including franchise operators) were particularly aggressive in financing deep subprime customers (with credit scores below 550) who purchased new and late model vehicles (less than 3 years old). Finance companies originated these “silly loans” with 5+ year terms and large monthly payments in an attempt to capture market share quickly.

3) Capital poured into the subprime auto markets making lenders overly aggressive in their underwriting policies and practices as evidenced by the aforementioned loans.

4) History indicates that higher default rates occur on auto deals with “too much vehicle and too little customer”. Recent Experian® credit data shows that quarterly repossession rates for the third quarter of 2013 increased by approximately 125% over the corresponding period of 2012 for these finance company lenders. More charge-offs can be expected in future periods from these overly aggressive lending practices.

5) BHPH operators again found inventory acquisition challenging. Lower new car sales from 2008-2012 has limited the supply of BHPH vehicles (usually more than 4 years old), and kept auction prices high. Manheim® data shows that a $5,000 vehicle purchased in 2009 averaged about 85,000 miles compared with approximately 120,000 miles for the same cost vehicle in 2013!

6) Technology played an important role in BHPH success. Most customers today now have smart phones. This cellular link has become an important way for BHPH operators to “connect and collect” with their customers and prospects. In addition, internet based marketing tools, payment device technology, and electronic pay portals were integrated into BHPH operations last year.

7) New regulatory challenges surfaced in 2013 when the FTC, CFPB, and various state attorney generals’ offices began to monitor compliance and investigate alleged deceptive practices. Even the Department of Justice joined in! Regulatory compliance today has added importance and more scrutiny is expected during the next several years.

8) Operators with financial flexibility from equity and available lines of credit fared best. Competition, economic uncertainty concerns from customers, and an increasing cost environment were the reasons why.

9) Given this environment, operators who managed risk successfully adopted a “controlled growth” strategy. Increased “cash in deal” made trial and error mistakes very costly and expansion expensive.

What’s Ahead for 2014?

Last year was challenging for the BHPH industry, but unprecedented profit opportunities are ahead for operators positioned to capitalize on them.

Sales increases may start slowly in 2014 as tax refunds will again be delayed and because special finance companies will be aggressive during the tax season. However, as the year progresses “silly loans” will decline as defaults increase and many deep subprime customers will likely return to the BHPH market, if BHPH operators maintain contact with them.

Although inventory availability will remain challenging, sourcing technology is available to find the desired vehicles. Operators who utilize these new tools will fare better than those who don’t. Operators should broaden their inventory mix to meet varying customer financial needs.

Regulatory scrutiny will force non-compliant “bad apples” from the industry thereby eliminating some unwanted and unfair competition. The increased regulatory scrutiny on consumer relationships will force operators to rebuild their bond with customers.

Increased “cash in deal” should be reduced with higher down payments and larger repayments rather than with higher sales prices and longer financing terms. Such strategy will reduce default risk and lower amounts being charged off. Operators who embrace technology can increase their efficiency and market share. The technology, which is now available, has never been better for those who implement it properly.

Operators who control their risk and who avoid “matching underwriting stupidity” can avoid increased defaults from deep subprime customers who face the reality of unaffordable car payments. Successful operators will rebuild customer bonds and regain market share. Capital availability will improve for operators with good management, systems, prudent underwriting, and good performance metrics.

Finally, operators who educate themselves to the latest industry developments, trends, new technology, and regulations through networking, reading, and training will succeed while others fail. “Learn more and earn more.” Education is the “Highway to Success”. Good luck!

Kenneth Shilson, CPA, is President of the National Alliance of Buy Here, Pay Here Dealers (NABD), which will host its 16th Annual National Conference for Buy Here, Pay Here and a Compliance Academy at the Wynn in Las Vegas, Nevada on May 18-22, 2014. For registration or for more information, visit www.bhphinfo.com or call 832-767-4759. Mr. Shilson is also President of Subprime Analytics (www.subanalytics.com), which performs electronic portfolio analysis and due diligence services for financial institutions that provide capital to the subprime automotive industry.