Recovering From the Pandemic in Subprime Auto Finance
By Ken Shilson
The COVID-19 pandemic has
been a game-changer for the auto business.
As more time passes, the
pandemic looks more like it will be a marathon rather than a sprint. So in
order for dealers to survive and ultimately thrive again, they must identify market
changes and adapt quickly to some new challenges.
Let’s discuss what we’ve
learned during the pandemic so far, and how training and education will help operators
find solutions to the new challenges for the future.
As the pandemic
continues without an end in sight, dealers must face the reality that the
subprime auto finance business is different than in the past – and the changes
will continue long after the pandemic ends.
What kinds of changes?
Subprime customers now
want to buy vehicles online and close the deal while spending less time, or
virtually no time, inside your dealership. That requires dealers to expand
their online presence and offer the ability to close customer deals without
meeting in person.
To do that, dealers
need robust underwriting and custom credit scoring models to make intelligent,
consistent, informed decisions. In addition, the information customers submit
via online applications must be independently and carefully validated before it
can be relied on.
Those changes require
dealer operators to implement the new technology needed to achieve the desired
Though most dealers
already have websites or use commercial portals like Autotrader, CarGurus and
others to display and market vehicle inventory for sale, many do not have
online tools to process and close deals remotely and electronically.
Technology tools like
Zoom and Skype, which were not widely popular before the pandemic, have now
become essential in working remotely with existing and prospective customers.
In addition, deal paperwork
must be automated electronically so it can be executed online. Tools like
SecureClose can be used to accomplish online closings.
Web-based dealer management
software systems are needed to process customer applications and store customer
information for customers who buy vehicles and for those who don’t qualify are
both important. That data can be analyzed and used to create or adjust
underwriting policies and to develop a profile of your “best” customers.
Turndowns should also be
reviewed to identify the type of customers who do not qualify and why.
That data is invaluable
in determining the propriety of your underwriting policies and procedures.
Generic credit scoring models
based on other dealers’ data will not provide the results operators really
Instead, I recommend
custom scoring models based entirely on a comprehensive electronic analysis of
your own portfolio data, not that of other operators.
The model score bands
should be correlated to actual default rates and they should form a lineal
progression (with the best scores having the lowest default rates and vice
validates whether the scoring model being used is working properly or whether further
adjustments are needed.
As subsequent market
changes occur, the scoring model should be updated for additional customer deal
data, rather than remaining static.
such as net pay, time on job, residence, rent payments, credit information and
other customer applicant information must be verified by personnel independent
of the sales department.
That validation process
becomes critically important given the more limited personal contact dealers
will have with their prospective customers prior to the sale.
alternative credit data into underwriting decisioning is also important when
prospective customers have a “thin file” or no traditional credit data.
Technology that allows
customers to view virtual videos of vehicles available for sale is needed to
supplement or replace the inspections customers have previously made at your
The virtual videos must
be sufficient for customers to determine if the vehicle meets all the purchase criteria
The pandemic has forced
dealers to set appointments with customers who want to physically inspect and
test drive a vehicle prior to their purchase.
That change has resulted
in increased operating efficiency – and it permits compliance with “social
distancing” restrictions that will likely remain for many months in the future.
After the test drive,
customers do not want to remain in your dealership to complete the paperwork. Therefore,
the electronic deal paperwork solutions discussed earlier are needed.
I’m sure most subprime
operators are skeptical that the aforementioned changes will actually work with
unbankable customers like they have for operators like Carvana.
But I have personally
seen that it does also work for subprime
and deep subprime deals. And it’s currently being used successfully by
operators today who have already made the transition.
must recognize and adapt to the aforementioned changes quickly to remain
competitive. Capital availability has tightened, so operators will be forced to
make the necessary changes sooner rather than later.
The best way to find the
new best practices is through dealer education and training. Dealer personnel
must abandon the “old ways” and adopt new ones.
Training and education will
expedite and facilitate that transition.
My message is simple:
Don’t resist the changes. Embrace them to succeed and remain competitive.
The subprime auto
finance business has changed – and you need to change with it.
Kenneth Shilson, CPA, is president and founder of NABD and
Subprime Analytics (www.subanalytics.com), which provides subprime portfolio
analysis for operators and capital providers in the subprime auto finance
industry. He can be reached at firstname.lastname@example.org or (281) 723-9508.