It’s come to the point that I cannot possibly devote the time and energy to contributing to this special finance blog and run my business. I keep promising myself and others, that kindly remind me that I haven’t written for some time, that I am working on the next post, but it seems to never happen.

I love special finance. It was my first promotion in the retail side of auto business, and since then I have seen it’s importance and have always been an eager student. I don’t want this blog to just sit on the web, as things develop in these very trying times, and as new readers subscribe every week, without any good educational stuff being added. I have received some really nice feedback over the last couple of years, and I’m hoping that means that reaching out and keeping the site running will be contributive.

The blog has a respectable amount of readers. I think it would naturally grow even more if given the attention needed.

So, I’m extending an invitation to readers: if you’re interested in writing on the blog please reach out and let me know. Writing on the blog is a good way to share your experiences and best practices with others, and a good way to show off your expertise, and make a name for yourself (who know’s, maybe you’ll be a guest speaker at some future NADA).

I’d like to have someone primarily from the retail side manage and contribute to the website, as well as anyone who services the industry as a lender or a vendor, or whatever. After a few posts, and we get to know each other, I’ll let that person take the lead on the site, and guide it in the direction they see fit. My only qualification is that the site remain unbiased. i don’t want it becoming a place for one sided promotions of certain products to take place, although I’m open to anyone making the case for their stuff or methods as long as the stance is fair and informative. Anyway…

I’ll continue to maintain the site, keep it optimized, which is my business (it usually sits on the top five results for “special finance leads“, “subprime auto blog“, “special finance auto blog” and other keywords related to the industry. It takes years to get those kinds of rankings, and it’s a nice opportunity to have a site that gets natural traffic as the platform for your voice.

We can talk about advertising, as well, as the site grows there is an opportunity for that, and other good things.

So, that’s the pitch. I’m hoping there are a few interested people. Please get in touch and let me know if you’re one of those people.

Thanks in advance for your help.

Best wishes,

Jim Wagner

I’m in the process of talking to a dealership about setting up a special finance department (actually I have my pitch meeting today at three). It’s a GM store, and these days I know that there isn’t a better challenge than this when it comes to trying to hammer a profitable subprime department together.

I’ve always advocated that the best way to start a department is to first get the buy-in from the dealer principle or general manager by giving them a good plan of attack. By first visualizing to them the profit potential of your efforts, and showing them a respectable ROI, it’s much easier to say, “Hey, I need support. It takes money to make money. How about a budget?” That’s why I created the spreadsheet that I later wrote about on this blog.

Having to use it today, I realized that there was no good place for me to place the costs associated with different marketing channels like special finance leads, subprime mailers, bankruptcy lists, etc. So, I had on of my guys update the channels to show a few extra marketing sources (like email marketing) and to show the cost associated with each marketing effort. We’ve also adjusted the formulas to calculate the totals for you. It takes less than 20 minutes to completely fill in the forecast, and it gives you a real good looking and effective visual description of just how you plan to make money for your dealership in special finance.

If you want the report, subscribe to the TheSubprimeReport here, or click the image on the right sidebar, and I will personally send it to you free of charge. Note to consulting companies: if you want the report, do me a favor and send me a link on your website. :) Shameless request for backlinks.

Take care.

Jim

It’s been a while since I’ve posted, and to those who have been kindly prodding me to write again, I apologize. I’ve been swamped with the business of starting a business, and I’ve neglected this blog. I’d rather not write than write stuff that doesn’t have substance, if that makes sense.

In the last year or so, there’s been a lot of changes and challenges in the special finance world. I would like to get your perspective on how you see things. Basically, I’m asking to interview YOU. Ask you how your world has been affected by the economic issues our country is having, and post the interview on this blog for readers to see.

If you’re a vendor, I’d love to hear from you as well. Even if you have something to sell, if you can make the case that your product brings a benefit to dealers, and you have something to contribute to the discussion, I’d be glad to talk to you.

Please contact me here if you are kind and generous to give me about 45 minutes of your time.

Thanks.

Jim Wagner

If you report directly to your General Manager, you’re doing something right. Or maybe your GM is doing something right. If you report to your finance director, you need to change this. You’re not going to succeed to your potential until you do.

I learned this lesson at a Ford store many years ago, where I started a special finance department. I was very excited about the position at first: the inventory was incredible (due to a very conservative used car manager who never put more than rough book into trades). I knew there was a ton of subprime traffic in the area and the hours were great. The store had very little experience with special finance. I thought for sure I’d be knocking the cover off the ball right away.

My first Saturday at the store proved me wrong. At about eleven, I was sitting at the sales tower, kind of keeping my mouth shut, trying to get to know everyone and learn their system. I knew there were three deals working and was waiting to see what the credit looked like. I was looking forward to showing everyone I knew what I was doing. The first deal, when it came to the tower, was on a three year old pickup truck with about 45 thousand miles. I quickly booked the car out using the NADA book I kept in my back pocket. The car booked great. I liked that. They ran the bureau, and I noticed that the credit score was about 550. I liked that too. I knew most captives wouldn’t like the miles, but that my special finance lenders wouldn’t mind.

Anyhow, the sales manager worked the deal nicely. After three pencils, and after dropping only $1700 off the starting figure, he had a deal, signed by the customer. He called over the finance director, Ted, my boss. Ted looked at the bureau, frowned at the mileage, and gave the deal to me (things were looking good at that point!). I said, “No problem, I can do the miles. The truck books well. These guys have real jobs, I can prove their income. I can do this one.” He said, “Great, let’s spot the car.” Then he grabbed the deal and gave it to his finance manager.

The second deal was a prime deal. The third, another special finance deal. He did the same on that deal as well.

At that point I knew why used car average profit was only $1500 and why his back-end numbers looked so good. Every one of these deals was a resign, and he knew it. Every bit of the hard earned profit on the deals was sacrificed when the customers came back to resign. Plus, with a much lower amount to finance, he was padding the deals with products, sometimes selling everything to customers and still keeping their payments the same or close to the same.

When his deals didn’t get financed, I inherited them. At that point, I had to justify a higher rate to the customer. Most of the time I lost the profit on the deal to keep the payments the same. Selling back end products at that point was close to impossible. Plus, customers leave unhappy, thinking they were deceived and tricked. My profits were pathetic. Instead of being a high profit source for the store, I was putting out fires and dealing with angry customers.

Does any of this sound familiar? If it does, you need to work some political magic. You’re going to need to establish credibility with your GM and dealer principle and change the culture of the store you are in. If you are talented and know how to generate business for your store, you deserve to have your own department. You are spinning many plates, using many skills and deserve the authority to say when deals should come your way.

If you can wrest control of your department from your finance director, with your own payplan and your own budget, you and your store’s best interests will be better taken care of. Your general manager will appreciate the healthy tension between yourself and your primary finance director. He will work harder to approve deals and you will work harder to show that sending deals your way can be more profitable for the store.

Basically,

It’s not easy, but I’ve done it a few times. On my next post I’ll talk about how to best accomplish this.

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Check out our new social network, The Special Finance Network.

Before I get started on this post, I’d like to invite everyone to join The Special Finance Network. It’s a social network specific to our industry. Industry specific social networks are a great way to connect with people that share the same interests. I think it will be a great way to share best practices and experiences with others. If enough people get involved, I think it can work out well. It would mean a lot to me if you guys took a few minutes to set up a profile.

Join The Special Finance Network here.

Ten Questions Special Finance Managers Should Ask Themselves

This list isn’t exhaustive, but it’s a good way to outline the topics that I’m going to cover in the next several posts. These are questions that I feel any special finance manager should ask themselves.

1. Who is my boss? Who do I answer to?
2. When questionable deals are in play, how does your dealership decide where to send that deal (prime vs. subprime)?
3. Do I have a complete forecast put together for 2008? Does it show which channels my profit will come from, how much sales volume I will have and what my total department profit will be?
4. Does my dealer principle feel my department is a priority? Does he back up this feeling with a strong budget?
5. Do you know what your department ROI is (return on investment)?
6. Does my dealership website drive special finance leads to my department? Is it optimized for search in your area?
7. Is your dealership spending money on online marketing in your area (Adwords, Yahoo Paid Search, MSN)?
8. Do you have a follow up system that keeps in touch with current customers, turndowns, previous customers and their references?
9. Do you understand how your inventory is stacked? Do you always know the top ten cars with the largest book-to-cost difference? Are you being sneaky about keeping those cars out of the spotlight so you can use them to make money?
10. How do your subprime lenders really feel about the business you’re sending them? Is your portfolio and relationships strong enough to get overrides when you need them?

I’ve been talking to a lot of dealers lately, and with very few exceptions, business seems to be way down (unless you’re a Toyota dealer). Even if your last name isn’t Bernanke, it’s not hard to see why. With the subprime housing crash, stock market instability, a credit crunch in the making, employment numbers down and many other ominous reasons, most consumers are putting big purchases on hold. Finding ways to succeed in this market is becoming difficult.

I want to talk about that. So, I’m going to start a series, a survival guide, discussing what successful special finance departments are doing today to navigate through the difficult waters we find ourselves in. In every down market, somebody is succeeding, right?. Let’s find out why. Before we get to nuts and bolts, let’s talk about mindset.

Special Finance Managers: Bury Yourself in Your Office and Get Your Attitude in Line

If you’re like most everyone in the retail auto business, you will have a sales meeting this Saturday morning. I think no matter where in this country your store is located, dealer sales meetings are all pretty much the same. Salespeople stumble in, management gathers in the front of the room and at 8:30 or whatever it is, you sit through a series of rah rah “Let’s sell some cars!” speeches. Everyone plays the game, acts positive, and gets involved in the excitement. Right?

After the meeting, after moving some cars around, grabbing a coffee and bagel or whatever, salespeople start to gather in their favorite spots. Managers huddle in theirs. Here’s where the real meetings take place. In a down market, in the privacy of their groups, what do most people do? They bitch. They complain about business. They blame. They spread negativity. If I’m wrong, ignore me. If I’m right, do me a favor: walk away. Close your ears. Dummy up.

Our Business is Changing. Old School is Out. You’re Going to Have to Wear Many Hats to Succeed.

Dummy up. Forget everything you’ve learned in the car business. Stop pretending that you know everything (even if you do). Understand that our business is changing quickly, and you’ve got to change along with it. Consumers today are more educated than ever. Banks are tightening up. If you’re going to succeed, realise that you’re going to have to find new ways to make your numbers. If you’re unfamiliar with the internet, you’re going to have to educate yourself quickly. If you don’t have an advertising budget, you’re going to have to learn how to pry that money from your dealer principle or GM. If your captives are buying deep into your business, there’s some political moves you need to make. If your website isn’t generating leads, you’re going to have to take care of that. Whatever it is that you’re doing today, unless you are knocking the cover off the ball, it’s probably not going to work tomorrow.

The good news is, if you change your mindset and stop listening to garbage, you’re already a step above the crowd. In this business, it’s not hard to be a 5 in a sea of 2’s. Understand that you spend most of your time at the dealership, probably more time than with your family. You might as well make better use of it. I hope I can help make that happen.

In the next few weeks, I’m going to discuss ways to take your business to the next level. I don’t know everything, so I’m going to reach out to dealers, lenders and vendors and start a discussion on how to turn this down market into an opportunity for yourself and your family.

Clean Office, Clear Mind

Before we get started on the Survival Guide, do me a favor: clean your office. Go through your drawers, get rid of old deal jackets, wrap up any deals that are hanging around (get them done or kill them off). Get yourself organized. Trust me, it will help get you focused.

If you’d like to contribute to these posts, please contact me here. I’d love to hear what you’re doing to stand out. If I’m annoying you or you’d like to tell me to shut up, you can do that too.

Next topic: Ten Questions Special Finance Managers Should Ask Themselves

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I noticed that the cover story in USA Today’s Money section says: “Repo Lots Overflow with Reclaimed Cars.”

The article states that repossessions are at their highest level in ten years. There were 1.6 million repossessions in 2007, which is a third higher than they were ten years ago. These levels are blamed on the turndown in the economy and the recent liberal credit policies of most of the subprime lenders.

I know from personal experience that, starting a few years ago, Wells Fargo was originating quite a lot of loans with high front end LTV’s and long terms, some without requiring proof of income. When I was a rep for HSBC Auto Finance I found it difficult to compete with their programs. Wells Fargo recently reported that it charged off 1 billion in auto loans last year! That’s 3.5% of their porfolio. I’m not sure if it’s their aggressiveness or a combination of it with the economic crunch we are in that has caused this situation. I’m not saying they did anything wrong, but I remember how many loans they were capturing with what seemed like a very liberal credit policy. I’m not sure they could have predicted this downturn.

Also I’ve recently read that Americredit is doing business with caution. I think, given the fact that their past liberal credit policies almost put them out of business and lowered their stock price to under a dollar, they don’t want make the same mistake twice. Their credit losses for the second quarter of last year are at 7.3%, which is a point and a half higher than the same period the previous year.

Americredit is performing more poorly in Florida than in other parts of the country. Given that Florida’s housing slump was probably the worst in the country, and that many local economies rely a great deal on housing, it makes sense that this deterioration coincides.

They are responding by reducing the amount of loans they will originate going forward, eliminating certain non-performing dealers and by reducing their sales force. Also, they will start to look at individual dealer portfolios when making credit decisions, which means that if your special finance department is very aggressive, and the performance of your loans isn’t the greatest, you might not get the overrides (exceptions) that you’re used to getting.

It’s going to be an interesting 2008. I’m looking forward to seeing how the recent 125 basis point reductions in the Federal Funds Rate will affect our industry. I think we’re tied in with housing. Next to a home, the automobile is the largest purchase. When housing starts to rebound, I think the auto industry will follow suit. The USA Today article said that many of the repossessed vehicles were luxury pickup trucks from people involved in the housing and construction related industries.

I’m going to start addressing more technology issues here. Stay tuned for more.

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The Cobalt Report Shows that Online Shoppers are the Majority

The most important take-away of the 2007 Cobalt eBusiness Dealer report is that our industry has transformed from a largely offline industry into a primarily online one. More than 80% of auto shoppers start their shopping efforts on the internet, and most of them start their shopping using search engines like Google, Yahoo and MSN.

According to a report released by Jupiter research and NADAguides.com, dealers are spending more money on internet advertising. In this report, about 100 dealers were asked how much they spent, in 2006, on internet related marketing. 43% of dealers said they spent more than 30 thousand and 28% said they spent over 50 (I’m not sure why we’re talking about ‘06 data when it’s almost ‘08). The report makes the point that dealers are focusing more on the internet. However, 30 thousand dollars a year is only $2500 a month.

I’m not sure dealers have responded as well internally. According to the Cobalt study about 30% of internet leads never receive a response from an auto dealer. Of those that are responded to, the average response time is over 5 hours. The report also showed that consumers expect a response in about 4 hours, which is more than reasonable. After 4 hours, online consumers begin to defect to other brands and other dealerships. Also, the majority of online consumers felt that they were not given an effective brand value presentation and did not have their questions answered. So, if dealers are spending more money on the internet they sure aren’t spending enough time on training and employee development.

The presenters of the Cobalt report feel that increased lead volume is outstripping the dealership ability to keep up with leads, which is degrading the quality of response. However, in the ‘05 report, when lead volume was not as high, dealers still took about 6 hours to get back in touch with leads. I’m thinking the issue is cultural. There isn’t enough buy-in. Pay plans don’t motivate salespeople to focus on leads.

On the automotive blog DealerRefresh.com, a salesperson called Earl left the following comments:

I get so sick and tired of these internet customers. You can’t make a dime off of them and they’re waste of my time. Let me tell you WHY!

They come into the dealer armed with information and print outs from Edmunds, KBB.com and other various websites. You end up spending half the day with them; answering their questions, explaining to them that what they read in the forums is misrepresented truth, test driving several vehicles while they compare everything to their print outs. After spending half of the day with them, building rapport, performing a great demo and product presentation while being very professional and courteous, I have to hear “I know your invoice, back end and the dealer incentive for this car, so I want your absolute BEST DEAL!”.

Two to Three hours later I realized that I just spent way too much time with this customer AND I’m about to make a whole WHOPPING $50.00 bucks for a mini deal. Really, it’s not worth the effort unless it’s a volume unit that puts me over the edge for a bonus. Otherwise, I’d rather wait around for a normal customer to visit the showroom floor, someone that I have a chance of making some real money on, and someone that will appreciate the service and time I can offer them.

This guy probably needs an attitude adjustment. It’s an isolated rant from a salesperson, but you can see that he’s not real motivated to work internet leads. Whether it’s tweaking his pay plan, or giving him a salary to work leads, or keeping him from working leads, there’s obviously a disconnect here.

A Recent Google Report Can Help You Understand the Online Buying Process

Understanding how online shoppers use search engines to purchase cars is an important insight that may help internet managers and special finance managers use the internet better to drive more business. Compete.com and Google recently released this presentation on how the automotive buying process works in search. It’s about an hour long. I think it’s worth taking a look.

You can see the report here: The Automotive Buying Experience: From a Search Perspective

If you run a special finance department at an auto dealership you’re looking at bad credit all day. If you have any traffic at all, several times a day you’re also making decisions about which subprime lenders to send your customer’s applications to.

That’s a normal part of doing your job. But, if you’ve recently decided that a customer’s credit was too rough to send to any lenders and you sent them home without submitting them, you could be setting yourself up for a lawsuit, if you did not send them an Adverse Action Notice.

What’s An Adverse Action Notice and Why Does It Apply to Special Finance Departments?

An Adverse Action takes place when a customer applies for credit (verbally or otherwise) and a lender denies the application (you probably already know this). Banks, credit card companies, and other creditors regulary review applications and either approve or deny credit. If they choose to turn down an application, The Equal Credit Opportunity Act (ECOA) requires them to send an Adverse Action Notice to the applicant(s) telling them why they were denied. The spirit behind this law is to prevent discrimination by forcing lenders to give specific reasons why they denied credit to anyone.

Because you usually send your customer’s credit applications to at least one lender, your auto dealership has a certain degree of safe harbor from a discrimination lawsuit, as long as those lenders are compliant and send notices.

If you don’t send a customer’s credit application to any lenders, then you alone are required to comply with the notification requirement of the ECOA. In a case called Treadway v. Gateway Chevrolet Oldsmobile, a Chicago area dealership was sued in part for violating the notification requirement of the ECOA.

For the sake of keeping this post short here are the relevant details of the case:

• Treadway, a consumer, received a direct mail solicitation targeted at consumers with recent bankruptcies and arrived at Gateway Olds to purchase a car.
• Gateway ran her credit and decided she could not qualify for an auto loan and sent her home.
• Gateway then called her and said they had a bank willing to give her a loan on a new car if she came up with a co-signer. They did not tell her that they in fact had not submitted her loan to any lenders.
• Treadway came to the store and said her godmother, Pearlie Smith, would co-sign. The finance manager then approved Pearlie for an auto loan. The dealer sent someone to Pearlie’s house to sign the paperwork. She did not read the paperwork and did not realise that she alone had bought the car and that her goddaughter was not on the loan (a straw purchase).
• After receiving statements from the subprime lender in Smith’s name only, both Treadway and Smith realised what had happened and stopped making payments on the car. Subsequently, Household bank repossessed the car. In 2001 Treadway sued Gateway for discrimination. Specifically they were sued because they made an adverse credit decision against Treadway and did not send an Adverse Action Notice to her.
• In 2003 the district court ruled in favor of Gateway over a technicality regarding how the allegations were formed. The case went to appeal in 2004, where the defendant won the case.

Before losing the case on appeal, Gateway defended itself, in part, by saying they are not truly a creditor and therefore were not required to send an Adverse Action Notice to the Plaintiff in this case.

Gateway’s First Defense: “We Can’t Grant Credit. Therefore we can’t deny it either.”

Gateway first attempted to deny that any adverse action had occured to Treadway because they don’t have the ability to grant anyone an approval for an auto loan. Essentially they were saying, “She didn’t get an adverse action notice because we didn’t take any adverse action upon her. We’re just a dealership. We don’t deny credit. Banks do that.”

In their decision, the appeals court wrote:

By unilaterally deciding not to send Treadway’s application to any lender, Gateway effectively denied credit to Treadway. Whether it is the lender or the dealership that makes the decision, both the action and the outcome are the same. In both cases, the decision maker (1) reviews the applicant’s credit report to determine whether she is creditworthy, (2) makes a determination adverse to the applicant (i.e., that she is not creditworthy), (3) decides not to proceed any further in arranging credit and (4) as a result the applicant is not granted credit. There is no logical reason why these same steps would be considered an “adverse action” when taken by a lender but not when taken by a dealership, given that the result is the same in either case.

The lesson here: if you don’t submit credit applications to any lenders, then courts will look to you as a creditor and will hold you to all discrimination laws that your lenders have to comply with. I’m guessing you don’t want that kind of responsibility.

Gateway’s Second Defense: “The ECOA doesn’t require us to send an adverse action notice because we only accept and refer applications to lenders.”

It’s not disputed that dealerships are considered creditors for the purposes of preventing discrimination. The ECOA is clear on that. Gateway argued, however, that it was not a creditor that was required to send Adverse Action Notices because simply referring applications to creditors (what the finance manager does) does not make one a creditor for the purposes of the notice requirements of the ECOA.

However the appeals court found that Gateways’ role was more than that, and that it was required to send adverse action notices. Here’s why:

1. Gateway admitted that it regulary decided not to send applications to any lenders (therefore it sometimes makes the credit decision itself)
2. Gateway participates in the credit decision by restructuring or renegotiating the terms of the sale to meet the needs of a lender (more money down or rehashing a deal)
3. Gateway set the percentage rate and benefitted from doing so

The courts see your special finance department and your dealership as a true creditor. There’s no distinction, legally, between you and your lenders, especially if someone can prove you regularly decide not to send application to any lenders.

Best Way to Avoid Trouble: Always Send Credit Applications to Your Lenders

By not submitting Treadway’s application to anyone at all, Gateway made a credit decision that was adverse to her. By not sending her an Adverse Action Notice, Gateway Chevrolet broke the law. If they had sent the application to at least one lender, that lender would be required to comply with the ECOA. I’m not a lawyer, but based on what I have read, this would have helped them win this lawsuit. Here’s what the appeals court said:

Gateway’s actions are distinguishable from the common scenario in which an automobile dealership decides to send a credit application to a limited number of the many lenders with which it works. The Federal Reserve Board has clearly indicated that merely “selecting creditors to whom applications will be made” does not make one a “creditor” for purposes of the notice requirements of the ECOA. See 68 Fed. Reg. 13155. In that situation, at least one lender is given the opportunity to decide whether to extend credit. Therefore, it is the lender, rather than the dealer, that makes the credit decision. Where the dealer decides not to send out the application at all, however, it is making the credit decision. Moreover, if the dealer sends the application to at least one lender, there is another party that can provide notice to the applicant. Where the dealer decides not send out the application at all, only the dealer can provide notice.

As long as you’re submitting applications to lenders, according to this opinion, your dealership is not a creditor that needs to send adverse action notices to customers.

Best Practices for Special Finance Managers

According to the 2007 DealerTrack Compliance Guide, you should send Adverse Action Notices in the following 3 situations:

1. you take a consumer’s credit application but don’t send it to any financing sources
2. no lender approves the customer’s application for credit
3. you unwind a spotted deal

Adverse Action notices must be sent within 30 days of receiving an application. According to the Guide, you can print a sample Adverse Action Notice in the Documents and Forms section after you’ve logged in to DealerTrack.

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Disclaimer

I’m not an attorney. Don’t take this as legal advice. Just a friendly chat among friends. :)

Useful Links

Read the full opinion of Treadway v. Gateway Oldsmobile Chevrolet

Summary of The Fair Credit Reporting Act

Fair Credit Reporting Act at Wikipedia

Federal Reserve Consumer Website