Posted 3 years ago
By: Ken
Shilson, CPA
President/Founder
Subprime
Analytics
NABD
The COVID-19
pandemic is a “game changer” for the auto business. As more time passes, the
pandemic looks more like it will be a marathon rather than a sprint. Therefore,
in order for dealers to survive and ultimately thrive again, they must identify
the market changes and adapt quickly to some new challenges.
In this
article, I will discuss what we have learned, to date, during the pandemic and
how training and education will help operators find solutions to these new
challenges for the future.
As the pandemic
continues without an end in sight, dealers must face the reality that the
subprime auto finance business will be different than in the past and that the
changes will continue long after the pandemic ends.
Here are some
of the more important changes that I am referring to:
Subprime
customers now want to buy vehicles online and close the deal while spending
less or virtually no time inside your dealership. This requires dealers to
expand their online presence and offer the ability to close customer deals without
meeting in person. Therefore, dealers need robust underwriting and custom
credit scoring models to make intelligent, consistent, informed decisions. In
addition, the information customers submit via online applications must be
independently and carefully validated before it can be relied upon. These
changes require dealer operators to implement the new technology needed to
achieve the desired results.
Although most
dealers already have websites or use commercial portals (AutoTrader, CarGurus,
etc.) to display and market vehicle inventory for sale, many do not have online
tools to process and close deals remotely and electronically. Technology tools
like Zoom and Skype which were not popular prior to the pandemic have now
become more essential in working remotely with existing and prospective
customers. In addition, deal paperwork must be automated electronically so it
can be executed on line. Tools like SecureClose can be used to accomplish
online closings.
Dealer
management software systems (DMS) which are web-based are needed to process
customer applications and store customer data. The applicant information for
customers who buy vehicles and for those who don’t qualify are both important.
This data can be analyzed and used to create or adjust underwriting policies
and to develop a profile of your “best customers”. Turn downs should also be
reviewed to identify the type of customers who do not qualify and why. This
data is invaluable in determining the propriety of your underwriting policies
and procedures.
Generic credit
scoring models which are based upon other dealers’ data will not provide the
results operators really need. Instead, I recommend custom scoring models which
are based entirely on a comprehensive electronic analysis of your own portfolio
data, not that of other operators! The model score bands should be correlated
to actual default rates and they should form a lineal progression (with the
best scores having the lowest default rates and vice versa). This calculation
validates whether the scoring model being used is working properly or whether
further adjustments are needed. As subsequent market changes occur, the scoring
model should be updated for additional customer deal data, not remain static.
Customer
stipulations such as net pay, time on job, residence, rent payments, credit
information and other customer applicant information must be verified by
personnel independent of the sales department. This validation process becomes
critically important given the more limited personal contact dealers will have
with their prospective customers prior to the sale. Integration of alternative
credit data into underwriting decisioning is also important when prospective
customers have “thin file” or no traditional credit data.
Technology
which allows customers to view virtual videos of vehicles available for sale is
needed to supplement or replace inspections that customers have previously made
at your dealership. These virtual videos must be sufficient for customers to
determine if the vehicle meets all the purchase criteria they are seeking.
The pandemic
has forced dealers to set appointments with customers who want to physically
inspect and test drive the vehicle prior to their purchase. This change has
resulted in increased operating efficiency and permits compliance with “social
distancing” restrictions which will likely remain for many months in the
future. After the test drive, customers do not want to remain in your
dealership to complete the paperwork. Therefore, the electronic deal paperwork
solutions discussed earlier are needed.
I am sure that
most subprime operators are skeptical that the aforementioned changes will
actually work with “unbankable customers” like it has for operators like
CARVANA. However, I have personally seen that it does also work for subprime
and deep subprime deals and is currently being used successfully by operators
today who have already made the transition.
In conclusion,
successful operators must recognize and adapt to the aforementioned changes
quickly to remain competitive. Capital availability has tightened so operators
will be forced to make the necessary changes sooner rather than later. The best
way to find the new “best practices” is through dealer education and training
as dealer personnel must abandon the “old ways” and adopt new ones! Training
and education will expedite and facilitate that transition. My message is
“don’t resist these changes; embrace them to succeed and remain competitive”.
The subprime auto finance business has changed and you need to change with it.
Good luck!
Kenneth Shilson is President and Founder of NABD and Subprime Analytics which provides computerized portfolio analysis for operators and capital providers in the subprime auto finance industry. Their website is at www.subanalytics.com or phone 281-723-9508. NIADA and NABD will hold a buy here, pay here and subprime virtual convention on September 22, September 29 and October 6, 2020. For further information and to register visit www.bhphinfo.com or call 832-767-4759.