State of the Industry-Has the Industry Stabilized?
By Chris Leedom
Recently, while speaking to a group of dealers at a convention, I was asked, "Do you foresee the failure of any subprime lenders during 2000?". This is a tough question to answer, but I believe that it is on the minds of more and more dealers. So what is the answer?
Obviously I do not have a crystal ball that enables me to peer into the future and predict the lenders that will be in business at the end of this year. I do keep a "Leedom File" on as many lenders as possible. In this file I analyze annual reports, loss reserves, delinquency trends, etc. So after reviewing this data, what is the answer to the question?
I believe that for the most part, lenders serving the subprime industry have stabilized. During the past two years we have witnessed the demise of over a dozen major lenders. Our current assessment is that many lenders seem to have found their niche. We are observing a slight increase in pricing in some lender programs. We believe this is in the best interest of both dealers and lenders. Hopefully this increase will shore up reserves and profitability. This will promulgate future lending to new subprime customers and continue to provide dealer profit. So among major lenders, we have little concern as to a major casualty.
However we do see some potential problems. I believe there is significant uncertainty with respect to the "D" or "D-" segment of the market. This is the segment of the market where the lenders hold 25 to 40 percent reserves. We believe that one or more of the lenders serving this segment of the market may experience significant operational problems. I have heard rumblings of concern over loss rates for this segment of the business and certainly the rest of the market is moving upstream. The few lenders serving this segment of the market seem to be attempting a similar movement. The question is, "Is it too late?"
Furthermore, we have witnessed increased activity with respect to legal proceedings against dealers, some of which appear to be nothing more than fishing expeditions for money to offset certain unprofitable blocks of business. For lenders reading this column, dealers don't always "turn the other cheek" and take it on the chin. Generally, dealers will not just get the checkbook out to settle without considering the options. If these filings are found to be baseless, and if more are initiated, could this lead to a class action suit against a lender? Maybe. If I am reading the writing on the wall correctly, there is no positive momentum in the "D" segment of the market. I believe it will become more difficult for these companies to sustain new loan volume as dealers pursue "in-house" financing. Dealers constantly tell me, for the risk versus profit potential one might as well hold the note in house. This argument certainly has merit for the dealer who has the capital to retain the entire profit of the deal. During my twenty group meetings, members are pursuing this discussion with increased frequency.
At the end of the day all we can do is wait and see. For now though, I hope each of you will experience continued profit and success in the nonprime/subprime segment of the market.
Christopher M. Leedom is a Professional Twenty Group Moderator with NCM Associates of Overland Park, Kansas. He is a recognized industry expert on sub-prime finance and is the Chairman and Founder of NCMÕs National Special Finance and Buy-here Pay-here Conference. cleedom@dealeronline.com
