By Kenneth B. Shilson, CPA, President

Subprime Analytics

With 2015 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. Although I acknowledge that these are typical performance barometers operators use to determine what kind of year they had – neither individually or together – tell how well the company managed risk, which affects future performance. The aforementioned analysis also does not provide any insight into how to do better next year!

            For the past eleven years, I have performed computerized analysis of BHPH installment portfolios for operators and capital providers using our proprietary software – Subprime Analytics. This analysis is the equivalent to giving your portfolio an “MRI”, and includes more than 1.5 million subprime installment contracts aggregating more than $15 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. The 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 by plotting loss curves. In addition, cash recovery projections for each portfolio are compared with the operator’s investment into that 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.

            Based on the aforementioned analysis, I have reached the following conclusions:

1.)    Each installment portfolio represents an operator’s most important financial asset because these contracts generate the cash flow, which fuels their operation. BHPH truly is the “finance business”.

2.)    Asset quality is as important a component of success as size. The best portfolios are built over time, not overnight -- and bigger is not always better!

3.)    Quality portfolios are products of consistent underwriting, developed by correlating the characteristics of each customer with the right vehicle and a proper deal structure. Although this can be done manually, it is more efficiently determined by using computer technology and correlation analysis.

4.)    Centralized underwriting does not assure positive performance – it only assures consistency! It takes analysis to identify what is working and what isn’t.

5.)    The local economic environment for operators often impacts performance, either positively or negatively, more than the overall national economic conditions. For instance, a plant closure in a particular economic area can have a devastating impact on portfolio repayment performance even when national employment data is improving. Therefore, it is imperative to monitor local economic changes periodically and to adjust when necessary.

6.)    Differences in local economic conditions like income, employment rate, and other customer stipulations necessitate the need for different business models. This is why many of the nation’s most successful operators utilize different business models, and why regional performance can vary even when the same business models are used. There are several models, which are used to succeed in BHPH, not just one!

7.)    Bad debt losses are a reality in BHPH (because customers lack adequate financial capacity to withstand normal life events like medical problems, job changes, divorce, etc.).  It is therefore imperative that operators mitigate their losses by maximizing recoveries when they occur. In the last few years both the frequency and severity of losses has increased, making recoveries even more critical to profitability.

8.)    Successful BHPH operators maintain consistency in their performance regardless of how the nation or the automotive industry performs. Using portfolio analysis, they adjust to changes in economic conditions quickly and avoid “trial and error” mistakes which result in significant charge-offs. In addition, they monitor recoveries closely and maximize them as part of their overall collection strategy. This is the case, even in states where remedial recoveries (garnishments and property liens) are not permitted.

            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 2015 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.

            Make every year better than the last one. Good luck!


Kenneth B. Shilson, CPA, is President of Subprime Analytics,, a consulting company, which provides subprime portfolio analysis services and custom credit scoring solutions (Profit Max). 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 Shilson is also founder and Convention Chairman of the National Alliance of Buy Here, Pay Here Dealers (NABD). For information about upcoming BHPH training events visit their website at or call (832) 767-4759.