By: Kenneth Shilson, President/Founder, NABD

Recent developments in the subprime auto finance market indicate that better days are ahead for the BHPH industry! The last 24 months have seen fierce competition for deep subprime customers from credit unions, finance companies and franchise dealers. Much of this competition has been fueled by billions of dollars from auto bond securitizations packaged by Wall Street and sold to investors who were seeking high investment yields. Some recent indicators suggest that better subprime market conditions are ahead for independent BHPH operators as follows:

1. 1. Some of the deep subprime auto bond securitizations are not performing as projected and further deterioration is expected during the summer months.
2. 2. Inventory availability continues to improve from auto bond repos, off lease and rental vehicles, and from franchise trade-ins.
3. 3. The deep subprime customers of today who are “car dependent” are finding new and CPO vehicles unaffordable for their limited financial capacity.

The aforementioned changes do not guarantee that every BHPH operator will automatically regain lost market share. Instead, they need to realize that the old ways of operating may not lead them to BHPH success in the subprime finance market of today.

We must learn from the deep subprime auto bond losses by recognizing the following:

1. 1. Selling late model vehicles to weaker credit borrowers does not end well.
2. 2. Lower down payments and repayments create longer terms, which increases default risk.
3. 3. The higher cost vehicles collateralizing auto bonds increases loss severity in early defaults.

A proper business model is needed to succeed in the competitive subprime auto finance market of today. Competition for the best customers will always exist so operators must adapt in order to compete successfully by:

1. 1. Evaluating your business model from a cash return perspective. Does it generate a cash return commensurate with your investment in the portfolio?
2. 2. Selling vehicles is important but “keeping them sold” is what generates long term success.
3. 3. Relationships not transactions are needed to keep customers paying over the life of the contracts. These weaker credit customers need a transportation solution, which keeps the vehicle running throughout the contract term.
4. 4. Collecting deep subprime installment contracts requires training, experience, and knowledge of the regulations in order to avoid significant operating and regulatory mistakes, which can cost millions of dollars!
5. 5. There are three important elements in every BHPH deal: the customer, the vehicle, and the deal structure. Good underwriting is needed at origination to properly match the customer with a vehicle they can afford.

In response to the changing market opportunities, I have surveyed the business models which are working the best in the current environment and the operating practices that generate them at our next NABD conference in Orlando on November 1 – 3. Many of the nation’s best operators and experts will share their tips and techniques to help other operators succeed. The conference theme is “Best Practices to Succeed Now.”

Will your own operation capitalize on these new opportunities? Is your business model designed for future success? Are you making compliance mistakes which will cause failure? Now is the time to take a look “under your hood” to get these answers. Good Luck!

 

Kenneth Shilson is President and Founder of the National Alliance of Buy Here, Pay Here Dealers (NABD), which is the nation’s largest special interest group for this industry. Information is available at www.bhphinfo.com. Ken is also President of Subprime Analytics who provides portfolio performance improvement analysis for operators and capital providers. For more information on the analytical services visit www.subanalytics.com.