By:          Kenneth Shilson

                President-Subprime Analytics

                If you attended the NIADA Convention and Expo at MGM Grand in Las Vegas in June, you are aware of the challenges ahead and proposed solutions.  Attendees received the “2021 Market Perspectives/Trends Report” and were updated by report contributors on changes during the first half of 2022 in a panel discussion.  If you did not get a copy of this comprehensive report please visit www.subanalytics.com so I can help you compare your performance results with your industry peers.

                This article highlights the most important takeaways from the 2021 report and the panel discussion update from the NIADA convention.

                Any look ahead at 2022 and beyond for BHPH starts with inventory availability and its cost.  Industry sales in 2022 are clearly being constrained by the shortage of 5-10 year old vehicles at reasonable acquisition costs.  Inventory related semiconductor production issues which pushed customers into used vehicles persist in 2022 and new car production continues to be disrupted by the Russian-Ukrainian war.  Limited used inventory and elevated pricing have reduced the amount of inventory to be purchased on speculation and successful dealers should continue to limit such purchases.  In the current environment, dealers must utilize technology to source the vehicles they need and stock the inventory their customers want and can afford.  In other words, they must look beyond just initial sales and focus on “keeping them sold”.  Although acquisition costs have stabilized during the last six months, significant cost decreases should not be anticipated during the remainder of this year.

                In order to buy more expensive inventory and grow sales, dealers must have access to more capital.  A major barrier to raising capital results from two of the biggest accounting changes in history which will be required during the next six months.  In 2022, new leasing rules require companies to list property and equipment leases as additional debt.  In addition, effective January 1, 2023, the new allowance for credit loss rules (“CECL”) requires operators to record a reserve on their balance sheets equal to expected future losses on their entire portfolio!  Both changes will likely reduce equity and trigger existing loan covenant defaults which can adversely impact borrowing capacity.  In addition, government stimulus payments and additional unemployment benefits ended with the pandemic making customer installment repayments more uncertain, given inflation and elevated gas prices.  Increased sales prices and related amounts financed provide offsets only if they remain collectible.

                In the highly competitive search for capital, lenders will differentiate between prospective borrowers by using portfolio performance metrics like static pool, CRR, and default rates.  You will also need metrics to comply with the new CECL accounting standard so if you don’t have them, make it a priority to get them ASAP!  Operators who borrowed their way into the pandemic can’t expect to borrow their way out if it!

                The regulatory environment in 2022 looks somewhat different than 2021 as both the CFPB and the FTC increase their focus on automotive financing, debt collections, and data privacy, making it imperative that dealers “tune up” their compliance management systems in order to avoid costly legal and regulatory mistakes.  In this heightened regulatory environment, it is important that dealers participate in their state dealer associations and support NIADA legislative initiatives in Washington.  Together our industry can make a difference!

The tax season continues to be an important time for BHPH dealers to grow and to regain lost market share.  Absent stimulus payments and additional unemployment checks it is the only time subprime customers receive an infusion of extra cash through EIC and tax refunds.  The 2022 tax season got back to pre-Covid patterns with a few changes.  The season lasted longer with more documentation needed for stimulus amounts, Advanced Child Tax Credits and other.  Dealers who used an effective tax marketing strategy combined with irregular payments captured more tax refund business in 2022 and from future refunds.

                The pandemic changed the way customers purchase vehicles from dealerships.  Customers want to shop, buy, and close purchases online and spend as little time as possible in your dealership with only a test drive in between.  This requires dealers to implement technology, automate, and utilize social media more extensively.  CARVANA has proved that customer buyer patterns have really shifted.  Independent dealers who take the time to understand these shifting consumer behaviors and who are future focused will thrive.  The old ways simply won’t work like they used to!

                At the time of this article, the Federal Reserve continues to raise interest rates in an attempt to control inflation.  Unfortunately for dealers with lines of credit that have floating rate interest, these increases will raise their cost of borrowing.  The cost to fix interest costs through rate swaps appears prohibitive at this time.  It is important that dealers consider the impact of these higher interest rates on their own cash flow and more tightly manage expenses.  Borrowing cost increases can’t be passed to customers in the short term so operators must offset them with increased efficiency, automation, and lower operating costs.

                Dealer training and education is the key to understanding and solving the challenges ahead.  My advice is to learn      from your peers by participating in your state association and NIADA while getting the specialized training you need.  Make compliance an integral part of your business.  Remember “the more you learn, the more you will earn!”  Good luck.

Kenneth Shilson is President and Founder of Subprime Analytics which provides computerized portfolio analysis for operators and capital providers in the subprime auto finance industry.  Visit our website at www.subanalytics.com or call Ken at 281-723-9508. Their services are designed to help increase capital and to identify more profitable operating practices.