Recovering From The Pandemic In Subprime Auto Finance!

Posted 3 years ago

By: Ken Shilson, CPA


Subprime Analytics



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 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 or call 832-767-4759.