I remember poking fun at my old dad back
in the early 1970s, when he didn’t realise the meaning of the word
‘gay’ had fundamentally changed to mean something else entirely
from what he understood. I think we have a similar problem right
now with the phrase ‘subprime’.
Most asset funders are owned by the banks, which
are risk-averse to the extreme, after having bought into high-risk,
high-yield subprime mortgage and investment packages that they
didn’t understand. Tempted by exceptional (but fictional) profits,
their decision-making process got hazy, their risk radar went
offline and they paid good money for bad paper.
Those of us that have a grounding in the motor
industry will understand what I mean when I allude to the ‘white
flagger’, the poor sap that buys every ancillary F&I product
And as they do so, the heart of the experienced
business or finance manager sinks, because he just knows the
customer is going to be bounced from every funder’s underwriting
In fact, if you listen closely, you may even hear
the call centre staff giggle a little on the phone when you’re
asking for a credit acceptance. Not easy to swallow when the times
are tough and deals are hard-won.
There is an opportunity here for our asset funders
to wake up, to sense the chance in this evolving marketplace and to
grasp the nettle of subprime lending. As the economy twists and
turns like most of the roads in Wales, redundancies are on the
rise; this in turn creates a brand new broad range of customers,
from almost-prime to deep subprime.
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Where have all the funders
So why is it that we are losing our
traditional specialist non-prime lenders? Let’s consider British
Credit Trust – writing business without paying commissions, but
still writing good volumes at rates which should be banking up
substantial provisions for the lender.
This may seem like a great business model
for a funder, but kills off a good proportion of the potential
business streams. Brokers can’t afford to pass deals that earn them
nothing, and as an industry we run the very grave risk of losing
that panel skillset if we are not careful.
Park, Blue, and of course Welcome in its current
guise are some of those that have been removed from the motor
finance landscape in the recent past, along with several others,
and that is a shame.
Whether it is irregularities in accounting
practices or just plain old retreating into their corporate shells,
it just does not make sense that those funders who saw the market
and profit opportunity pre-September 2007 have the lack of
foresight to pursue that very same market as it grows in size,
while competition in that market reduces – enhancing overall yield
and reducing risk.
I have a website which dealers and customers alike
utilise to propose deals to a non-prime funding panel. In the last
three months I have seen the number of proposals double through the
site, the number of lenders on the panel fall, and those funders on
the panel get more and more fussy and pick over what they will and
I can’t and won’t apportion blame to any one
funder, and neither can I criticise them for taking the opportunity
to cherry-pick the best ‘below the line’ deals, but I will stress
their responsibility to that market.
You have a duty Mr Subprime Funder, you have an
obligation to pass the message up the line, to present to the board
of your wholesale funders, to explain to them that asset-backed and
secure UK based subprime funding for motor has got sod-all to do
with billions of dollars’ worth of ridiculously toxic subprime
Subprime clearly has a double meaning; to
us in the motor industry it means a real customer, with a real
need, who has a blemished history, not a pre-destined future.
To the banks that fund those specialist lending
arms, subprime probably means ‘that bloody great financial
catastrophe we would rather bury quickly and never add to our
balance sheet again’.
I am afraid even the big banks have a duty here:
your inability to feed LIBOR and the inter-bank markets is causing
the failure of business, which is eroding market confidence,
slowing spending, stalling economic resolve, and creating more
subprime customers on a daily basis.
It seems funny now that such a little phrase can
carry such a different meaning, and how easily it can be
misinterpreted. The industry needs providers of good subprime
funding; otherwise the food chain breaks down, the model stalls,
and the UK automotive market suffers.
So come on, understand the part banks have to play
in this industry, acknowledge that banks’ poor decisions and losses
on subprime US mortgages and securitised packages have no bearing
whatsoever on subprime UK motor loans, but be mindful it is your
caution on money into the markets for the last 20 months that has
created an even greater market for good subprime motor finance.
Our wholesale funders think subprime lending means
high risk, no profit, no security, and massive provisions for
losses. To me, subprime means “less than perfect”, a phrase that
has regularly been applied to all of us in our industry.
You created this opportunity, now help to resolve
it, and turn a profit in the process.
The author is director of Profit Training Ltd,