Posted 6 years ago
Learn From Your Year End Losses So You Don’t Repeat Them!
By
Kenneth B. Shilson, CPA, President
Subprime
Analytics
With 2017 in the rearview mirror, many buy here, pay here (BHPH)
operators will evaluate last year’s performance by reviewing sales figures and
the “bottom line” of their year-end financial statements. I acknowledge that these are typical
performance barometers operators use to determine what kind of year they had – but
neither individually or collectively – tell how well the company managed portfolio
performance or risk. The aforementioned analysis also does not provide any
insights into how to improve portfolio performance in the future.
For the past thirteen years, I have
performed computerized analysis of BHPH installment portfolios for operators
and capital providers using our proprietary software – Subprime Analytics. This
analysis is equivalent to giving your portfolio an “MRI”, and includes more
than 1.7 million subprime installment contracts aggregating more than $19
billion.
The Subprime Analytics reports
contain performance metrics and evaluations of installment portfolios for many
of the nation’s most successful BHPH operators. These metrics include static
pool (measures the severity and frequency of losses) and loss to liquidation
(measures the pace of losses), and “drill downs” into virtually every aspect of
their deals. This analysis looks at customer attributes, vehicle types, and
various other components of each deal structure, including the amount financed,
contract term, repayment intervals, payment amount, interest rate, markup, etc.
These historical metrics allow us to
forecast future loss rates and predict collection performance. In addition,
cash recovery projections for each portfolio are compared with the operator’s
investment in their portfolio to determine return on investment (ROI). ROI
performance gradients have been established for below average, average and
above average returns. These gradients are then used to compare each
portfolio’s ROI against an overall master database of comparable peers, and to
assess the cash efficiency and profitability of an operator’s underlying
business model.
The analysis described above has
caused me to conclude that superior performance is achieved by studying the
losses of each portfolio, and adjusting underwriting and collection procedures
where necessary.
When studies are performed utilizing
data from multiple periods (over several months and years) of originations, the
results provide a more valid barometer of performance than financial statements
or sales data.
In conclusion, as you evaluate your
company’s performance for 2017, take a “deeper dive” into your losses so you
don’t repeat them. Improve future performance and cash flow by identifying,
understanding, and correcting past underwriting mistakes.
Kenneth B. Shilson, CPA,
is President of Subprime Analytics, www.subanalytics.com, a consulting company, which provides
subprime portfolio analysis services. Subprime Analytics utilizes
state-of-the-art data mining and extraction technology in order to identify
loss trends and areas for underwriting improvement. Questions can be directed
to him at ken@kenshilson.com or call 832-767-4759