Lenders Getting Choosey

Last year, dealers controlled the relationship with their lenders, but the ongoing credit crisis in the U.S. is giving financial institutions more say in whom they do business with.

Banks that have been mainstays for years in providing floorplan financing for dealers, as well as consumer credit, have been tightening their requirements, or worse, pulling out of the automotive sector completely.

The Atlantic Automotive Group in Fort Salonga, NY, recently lost two of its primary lenders.

Michael Brown, vice president-operations, says he thought replacing them would be a simple task. But he admits he doesn't have an answer.

“(Lenders) who were begging me months ago for my business still take my calls, but they don't have much to say,” he tells attendees of a recent American Financial Services Assn. Vehicle Finance conference in New Orleans. “This is one thing I never thought we would have to worry about.”

Lenders are being selective in which dealers they service. The decision often comes down to which dealers have been good partners through the years.

Frank Armstrong, president of the World Omni Financial Corp., says the focus used to be about procuring as much business as possible. Now it's more about helping customers make it through the credit crisis.

“We might have fought tooth and nail last year for that business,” Armstrong says. “Maybe not today.”

Yet, Omni still will provide floor-plan assistance to dealers that are managing their businesses but have lost their financing source. However, for dealers who want to quibble about pricing, that discussion is far down the list of priorities, Armstrong says. “The message we have, is if you need floorplan, we're here.”

Omni also has tightened its credit-verification process for automotive loans. Its percentage of approvals has stayed the same throughout the credit crisis, but “it's not an automated quick answer any more,” he says.

The problem isn't so much fraud from the dealer or consumer, although that does occur. Rather, it's the challenge of managing declining vehicle prices, Armstrong says. Omni places much less importance on a consumer's credit score when evaluating an application.

Instead, it looks at 30 to 35 areas, including an applicant's home ownership, time spent on the job and annual salary, in order to make its decision.

Dealers who have skirted the edge by padding credit applications to get them approved likely will have a tougher time today.

Sanjiv Yajnik, president of Capital One Auto Finance Inc., says his company is turning only to dealers it trusts. “Approving loans today is a matter of relationship,” he says. “If we're not seeing a lot of fraud coming through, then we'll work with that dealer.”

Captive-finance firms also are changing their practices, says Stephen Smith, senior vice president-American Honda Finance Corp.

At one point, Honda Finance realized it was funding nearly 80% of the auto maker's U.S. vehicle sales, a figure it deemed much too high. It now has relationships with several large banks that help provide consumer credit as a way to mitigate risk, a practice Smith calls “prudent management.”

While the captive firm is in the process of expanding its floorplan financing business by about 25%, it's doing so selectively, Smith says. “If the dealer has alternatives, we ask him to go to the back of the line.”

To manage risk, even though there is little of that among Honda dealers, American Honda Finance did raise its rates somewhat.

“Dealers are telling us, if it's between raising the rate or getting floorplan, they'll take the floorplan,” Smith says.

Brown, from Atlantic, says his group prefers to send all of its consumer business to the captives, but is being advised to branch out to other banks. “(Captives are) telling us, ‘please, you won't insult us.’”