For the dealers and lenders in the sub-prime industry, "we made it through 1998" may be an appropriate tag line to sum up last year. 1998 saw at least eleven national lenders exit the market, with many more feeling the tightening of capital. Let's focus on what is in store for dealers in 1999 and make some "predictions" for this year.
Prediction number one is that the number of companies exiting the marketplace this year will be about a handful. There are a few lenders poised for consolidation or acquisition so look for some continued shakeup. This is a good thing since we are left with a "survival of the fittest" scenario.
Prediction number two involves credit underwriting and pricing. Look for lenders to continue tightening credit guidelines. The days of competition-driven buying may be a thing of the past. Lenders are under such scrutiny to acquire loan portfolios which perform that they have had to adjust their underwriting practices. Additionally, some lenders are considering increasing buy fees to reflect the true risk of the paper. Sure, it's nice to have everything bought at a flat $100 buy fee. However, if that lender goes out of business because of poor buying versus pricing, who cares? We need the lenders to price the paper to make a profit and continue buying more paper. That way, we can continue to do what we do sell cars and make profit.
Prediction number three is look for continued instability of the true D minus tier. This tier involves the lenders who buy paper and hold a thirty to forty percent dealer reserve. This end of the business has seen a number of participants with problems. It appears more of this business is beginning to shift back to the buy-here pay-here dealers. This type of paper is probably better serviced by a local dealer than a national company trying to collect the note. In the past, these companies have held enormous reserves (JayHawk) and still went bankrupt. Others out there right now have some problems hidden in their portfolios. Watch this end of the market carefully.
Prediction number four is somewhat obvious we will see fewer new entrants to this market than in any of the past five years. The availability of capital for sub-prime companies has become almost non-existent. Consequently it is more important than ever to establish some solid relationships with your current lenders. Make sure you preserve these relationships! It will be critical to your success in sub-prime.
Next year at this time, we'll look back on these predictions for 1999 and see what actually transpired. I don't think I will be very far off the mark. Until then, good luck and make it happen.
Mr. Chris Leedom is a Professional Twenty Group Moderator with NCM (Nichols, Campbell Morrow). He is also the Chairman and founder of the National Conference of Special Finance. If you have specific questions or require more information about this subject, please check the appropriate box on the reader response form on page 3.