As the year closes, it is time to look forward and plan for
next year. Recent performance data for the subprime auto finance market
indicates that better days are ahead for independent BHPH operators who can
capitalize on the opportunities.
Recent data from Experian indicates that through the third
quarter of 2016, “installment finance contracts with deep-subprime consumers
dropped 2.8% to the lowest level on
record since 2011! Looking specifically at used vehicle financing, analysts
noted that the subprime auto finance sectors saw an even larger decrease.
Financing for consumers with deep-subprime credit dropped by 5.3% to 5.11%, the
lowest Experian has seen on record since 2007.”
This market change with deep-subprime customers (who prior
to 2014 purchased BHPH vehicles from independent operators) subsequently bought
and financed them from franchise dealers, independent finance companies and
credit unions. The recent market change
now allows independent operators to regain that lost market share.
The third quarter Experian report shows that lenders reduced
loans to subprime and deep-subprime risk tiers while increasing loans to
consumers with better credit. Although the credit unions continue to
aggressively grow market share, the other competitors have tightened
underwriting standards and are focusing on consumers with better credit scores.
Independent operators can benefit from the aforementioned
market change by regaining market share lost during the last 3 years if they
are positioned to do so. Here are the important things they will need to
prosper in 2017 and beyond:
Capital availability to fund future growth,
A proper business model to “keep the new deals
sold” over the life of the installment contracts,
They must rebuild their “bond” with previously
lost customers and use the web and social media to find new ones,
Participate in dealer education to avoid
underwriting and collection mistakes that reduce profitability and create
costly compliance problems, and
Carry inventory that provides affordable
transportation to credit impaired customers on reasonable terms;
Here are the best ways to get the items needed to succeed:
Capital to fund portfolio growth should come
from collections, equity or from borrowings under lines of credit or by selling
previously originated contracts. Dependence on borrowed capital or by
liquidating existing portfolios reduces an operator’s financial flexibility and
should not be relied upon. “Keeping contracts sold” and collecting payments is
more important than just increasing originations.
The best way to evaluate your existing business
model is to study past bad debt losses. This analysis requires you to look
“under the hood” of your portfolio at year-end when all charge-offs have been
recorded. To understand what performance metrics are needed and ways to utilize
this information to make better underwriting decisions visit www.subanalytics.com and watch two free
videos on the home page of this website.
The best way to rebuild customer relationships
is to contact past customers via mobile, web and social media technology. You
may find that those customers are unable to afford the vehicles sold to them by
your competition and are seeking more affordable transportation!
Dealer education is needed to become familiar
with market and regulatory changes and to avoid making compliance mistakes. At
the NABD National BHPH conference on May 23-25 at Encore in Las Vegas the
program will focus on “the changing world of BHPH” and the best ways to meet
new challenges. Legal and regulatory updates will also be included in the
conference agenda. The more you learn, the more you will earn!
Efficient systems are needed to grow portfolio
profitability. During the last 3 years many independent operators reduced
overhead due to reduced sales. Instead of restoring these previous overhead
levels, implementing new and improved technology for underwriting, collections
and inventory sourcing is a better alternative. Operators can see and evaluate
the new technology at upcoming educational conferences.
Sourcing, acquiring and reconditioning good
inventory has always been challenging. However, the aforementioned market
changes has reduced competition, increased supply, and caused wholesale prices
to decline. New technology is available to broaden inventory sourcing options
and increased repossessions enhance availability.
Independent operators cannot regain lost market share
immediately. BHPH portfolios are best built over time and not overnight! In the
New Year, operators are encouraged to benefit from competitor’s underwriting
mistakes, not repeat them. Good Luck!
Shilson, CPA, (Ken@kenshilson.com) is President of Subprime Analytics (www.subanalytics.com) and NABD (www.bhphinfo.com). Subprime
Analytics uses data mining to perform computerized portfolio analysis for
operators and capital providers. NABD is the nation’s largest BHPH used car special interest group for
operators and product providers with more than 13,000 members. NABD will host a
National BHPH conference on May 23-25, 2017 at Encore in Las Vegas. For more information
call 832-767-4759 or visit www.bhphinfo.com.