Role reversal as dealers woo
lenders, outlook a little less gloomy, Chrysler vehicles under


Dealers woo

The days of lenders wooing dealers with
fancy vacations and front-row tickets to baseball games are gone.
Thanks to the tightening credit market, dealers are now courting
lenders while trying to learn the ins and outs of what financiers

“Back in the flourishing days, so many
[lenders] were knocking on our doors,” said Sharon Shults, finance
director at Paramount Automotive Group.

“‘What have you got for me today?’ they
would ask. Now [dealers] are in their offices trying to wine and
dine them, saying, ‘Don’t cut us off,’ ‘Please work with us,’
‘Let’s make a partnership.’ One of our [lender] reps has lunch
scheduled with [different] dealerships every day for the next two

R Ernie Lee, general manager of Rimrock Subaru Kia,
has watched the trend unfold at his dealership, too. Previously,
the dealership was approached “every other month by a new lender,”
he said. That scenario has ended, though, because of the “number of
lenders leaving our world,” he said. As such, Rimrock Subaru Kia
has renewed its captive relationships and bolstered its credit
union and local bank relationships.

“We are dealing with rural, small-town banks,” he
said. “It is all about getting to know the person who will do loans
directly. You have to learn what exceptions they will make. It’s
about starting a dialogue.”

Reining in monthly

Consumers are not the only ones who have
let monthly auto loan payments get away from them. Lenders, too,
have gotten caught up in aggressive underwriting techniques that
have prompted them to approve loans for more than borrowers could

“Non-prime and subprime payments were getting too
high,” said Mike Ritter, chief executive of Flagship Credit Corp.
“We want to keep payments at a level a buyer can afford.”

Aggressive underwriting stemming from heavy
competition a couple years back is partially to blame for the
steady upswing in monthly payments.

“In 2006 and 2007, [a payment of] $500 [£329] or
$600 a month was the only way to get business,” he said. “[Now] when we see payments over $500, we don’t like it. We want them in
the mid-$300s to mid-$400s.”

Setting terms

Loan terms are another consideration for
lenders in their bid to negotiate lower payments. Historically, if
a borrower needed a lower monthly payment, the lender would simply
extend the loan term.

Rather than set a 60-month term for the
financing, for instance, the lender would affix a 72-month term. On
a $14,000 vehicle, the difference in monthly payment between a
five-year loan and a six-year loan is about $40 a month. But these
days, lenders are more diligent at keeping loan terms in check.

“We don’t go over 72 months,” Ritter
said. “Our average is 68, and it is going down a little bit. We
would do an occasional 84-month loan in 2006. For a while there was
a big push for 75-month loans.”


Lenders eye slowdown in volume,
performance slips

Sure, lenders predict loan and lease originations
will decline, underwriting standards will stiffen, and
delinquencies and chargeoffs will worsen in the next 12 months. But
compared with their sentiments in December, the degree of
tightening is slowing.

The overall outlook cited by respondents to the
Auto Finance Forecast Spring 2009, a survey conducted by Auto
Finance News, was that volume will either hold steady or drop about
10 percent in the next year. By comparison, the majority of
respondents to the Auto Finance Forecast Winter 2008 survey were
anticipating declines in lease and indirect loan volume as high as
20 percent, and loan delinquency deterioration in the 10 percent to
20 percent range.

Profit expectations have improved, too. Respondents
to last month’s study predicted a 1 percent to 10 percent increase
in net interest margins. That compares with an expected 1 percent
to 10 percent decline mentioned in the winter survey.

Ultimately, though, the changes will strengthen the

“While our principal portfolio balance will
decrease, the performance of the portfolio [yield, delinquency, and
chargeoff] will continue to improve due to improved rate
structuring and more restrictive underwriting,” wrote one


Chrysler, GM vehicle values
poised for cuts

Residual and used-car values have dropped for both
Chrysler and General Motors Corp, but now-bankrupt Chrysler faces
greater risk of further price erosion.

Automotive Lease Guide is currently reviewing
Chrysler vehicles for additional reductions to residual value
estimates, James Clark, the data provider’s general manager, told
Auto Finance News.

“The purpose of the new assessment is to determine
what’s the downside risk from where we are even today,” Clark said.
“With Chrysler, this is the first time we have a large, full-line
manufacturer going through this kind of restructuring.”

Chrysler filed for bankruptcy protection on 30
April. ALG is also reviewing GM brands Pontiac and Saturn. Pontiac
is to be discontinued next year; Saturn’s production will cease by
the end of the 2012 model year barring a successful sale or
spin-off. With Pontiac and Saturn, though, ALG has a frame of
reference for its residual value-setting modifications.

“We have seen Oldsmobile [discontinued in 2004], so
we have some benchmarks to give us a little better guidance,” he

ALG further lowered residual values – for all
manufacturers – at the start of the year because of an expectation
there will be “high gas prices in the near future,” he said, and
because demand for vehicles is slowing.

“This isn’t going to last forever, but it won’t be
the same speed of recovery as in the minor recession of 2001,”
Clark added.

Easing: How do you expect credit
underwriting standards will trend?


Winter 2008

Spring 2009

Much tighter






Stay the same






Much looser



Source: Auto Finance Forecast