OPPORTUNITY KNOCKS FOR BHPH DEALERS!
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. Some of the deep subprime auto bond securitizations are not performing as projected and further deterioration is expected during the summer months.
2. Inventory availability continues to improve from auto bond repos, off lease and rental vehicles, and from franchise trade-ins.
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. Selling late model vehicles to weaker credit
borrowers does not end well.
2. Lower down payments and repayments create longer
terms, which increases default risk.
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
1. Evaluating your business model from a cash
return perspective. Does it generate a cash return commensurate with your investment
in the portfolio?
2. Selling vehicles is important but “keeping them
sold” is what generates long term success.
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. 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
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!
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.