San Francisco — Auto dealers want fair warning when lenders change standards and practices in response to tougher credit market conditions.
“Dealers are big boys, we understand change,” says Jeff Hodge, operating partner at Honda World in Downey, CA. “What hurts most is when a lender makes a structural change without communicating it.”
More such changes could be forthcoming as financial institutions deal with heavy losses (especially in the mortgage industry), tighter money and falling credit scores for many consumers once in relatively low-risk lending categories.
It is making it more difficult for dealers to arrange indirect loans, ones done through third parties and comprising the lion's share of auto financing.
Dealers complain lenders sometime are reluctant to tell them of tighter lending standards.
Instead, dealers often learn of those changes when certain types of customers, who had received auto financing before, suddenly are being turned down or facing tougher terms, such as higher interest rates, larger down payments and loan lengths limited to six years.
It can catch dealers off-guard.
“We can handle the bad news, but a lot of times people are afraid to give it to us,” Hodge says at the Consumer Bankers Assn. auto financing conference here.
Whether it's revising vehicle repossession policies or levels of tolerance for delinquent loans, lenders often fail to inform dealers in timely ways, says Gil Perez, general manager of John Elway Toyota, Ontario, CA.
“Coming in and telling us a day or two before a change takes effect isn't enough,” he says.
Dealers want the straight facts, says Eric Strickland, president of Ronnie Lott Auto Ventures, a firm that owns Tracy Toyota and Mercedes-Benz of Medford, OR. “We don't need to have it soft-pedaled to us.
“Lenders may fear we'll cut them off otherwise,” he says. “But that is not the case. A bad deal for a lender is not a good deal for a dealer, and vice versa.”
Lenders usually take on some high-risk loans from a dealership if it also forwards enough low-risk loans from customers with good credit histories.
Lenders complain of dealers who forward a disproportionate number of applications from high-risk customers with credit problems.
“We react more to dealerships sending us 20 loan applications, and we're only booking one,” says Oscar Joaquim, senior vice president at Citizens Auto Finance in Rhode Island. “It goes to the quality of the application.”
Conversely, dealers complain about lenders who “cherry pick” the safest loan applications and reject the rest.
Finance firms could do a better job of telling dealers what their portfolios look like, including the number of defaults and repossessions, says Bruce Goetsch, finance director for the dealership chain Lithia Motors Inc.
“Tell us where your sweet spot is,” he says. That way, dealerships can do a better job of sending an appropriate mix of loan applications.
It creates customer problems for a dealership when a lender inconsistently turns down loans, Hodge says. It would help him as a dealer to get lender feedback on their parameters and their spread of low-risk to high-risk loans.
Otherwise, when a loan application is rejected, “I may get three different impressions about what took place; one from my general manager, one from my sales manager and one from my F&I manager,” Hodge says.
Dealers at the CBA conference also beef about lending-firm representatives who visit but lack authority to help in substantive ways.
“Some representative do nothing more than drop off pens and cookies,” Hodge says. “Very few are empowered to roll up their sleeves and get on the phone with a credit manager back at the bank.”
On the other hand, some visiting representatives are helpful, he says. “We've seen both sides. There's often a significant difference between rep A and rep B.”
A lender's representative should know the business well enough to offer and provide help when needed, Perez says. “Otherwise it's a useless visit.”