Sunday, October 01, 2006

A Primer on Non-Prime Lending


I recall that when I first began to talk about non-prime deals in the RV business, dealers would quickly remind me, “Jan, that is in the auto business. We sell RV’s, we are different. Our customers all have 700 scores or better.”

Well my friends, times change. And so have RV customers. While dealers enjoy many customers with high credit scores, they also see more of them with credit challenges. If you want more sales, you must explore every opportunity. And that means learning how to market to, and work with, non-prime customers and lenders. (Most lenders seem to prefer non-prime to sub-prime, a turn of phrase I am happy to oblige.)

The number crunch

The general rule of thumb FICO scores are:
* 729+ = “A+” Superior credit. Automatic approval when you can satisfy the list of requirements on the lender’s buy rate sheet.
* 700-728 = “A” credit. Some lenders grant automatic approval, provided you can satisfy their buy rate sheet requirements.
* 675-699 = “B” credit tier. This person may have one or two past delinquent accounts that are now current. Or the person may have “A” tier credit but needs the terms extended, so the lender may place them at a lower tier due to the increased risk.
* 650-674 = “C” credit tier. This credit report will show some collection activity and high credit card debt. (Debt exceeds 50% of the limit in revolving credit card obligations.)
* 649 = “D” credit tier. This report may have a bankruptcy, high credit card debt, or collection account activity, as well as brief time in a job, short time in the area, or minimal equity, any or all of which make extras such as the purchase of an RV or motorcycle seem more like a dream than a possibility.

Discovering credit challenges

The non-prime focal point is the “D” credit tier. This group is generally comprised of hard-working individuals who have lived through some extraordinary experiences. The deal needs to be worked differently for those who have a lower credit score. It is not about what they want to purchase; rather it is all about what they can qualify to purchase and whether you can sell the deal to the lender and the unit to the customer.

Timing is everything. When you discover these credit challenges in the sales process is critical to your level of success. Sales personnel are the front line for credit information and need to be aware of the right questions to ask during the initial interview, such as: What are you RVing in now? How did you pay for it?

If the customer says, “We do not currently have an RV – we gave our last one back to the dealer,” you might want to turn the customer to the F&I person to find out about the details of the repossession. What customers often describe as “give back,” lenders typically characterize as “voluntary repossession.”

Perhaps the customer is using a truck as a trade-in vehicle and the lien holder of the truck is a non-prime lender, for example: Triad Financial / Household Financial / American General / Western Funding / CPSD Financial / Drive Financial. You will find these and other non-prime automobile lenders on the World of Special Finance Magazine web site. Go to www.WOSFmagazine.com and follow the links to the complete lender list.

Verifying credit matters

If, during the initial interview, the customer asks the sales representative if the interest rates are less than 35 percent APR, they may have been quoted a high rate by someone else for a reason. This would be a great time to bring in the F&I manager to conduct a credit interview, secure a credit application, and pull a credit bureau to verify the facts, such as they are.

Knowledge is power, and we need a lot of who/when/where/what knowledge to deal with lower credit scores. Who was hurt? When did it happen? Where was the family financially? What was done to correct the financial difficulty? If necessary, have the customer write a statement of the facts as they know them to be and confirm all that you can before submitting the deal to the lender. At minimum, you will need to verify employment, income, residence, and the fact that all the debt is now current, the bankruptcy has been discharged, and credit has been re-established.

Making a CASE for the Deal

Lenders are in business to make deals. However, the deal must make sense to executive management and to the bank auditors. It is up to you to prepare a CASE for the customer’s credit, ability, stability and equity.

If a customer has had credit difficulties, they should not be looking at a Class A unit unless they have 75 percent down in cash. Then maybe you will have a chance to secure the financing. Most of the time, when it comes to non-prime, the collateral will be a smaller towables unit, and the finance amount should not exceed $40,000.

RVs are considered luxuries rather than necessities. When the times get tough the extras in life are the first to be released, returned, or repossessed. Regardless of what you think you have heard, I do not know a lender who has gained from dealing with repossessions. In fact repossessions put them in the hole, and with RV’s, the hole can be large enough to drive the biggest Class A through.

Medallion and Merrick will only fund towables. Marine One is an equity lender who will fund with 15 percent down provided all other stipulations are met. American General will fund loans from $1500 to $1.5 million based upon the equity, the collateral, and the customer. While you will be sacrificing the reserve income using American General, you will be satisfying the mission to make a deal. American General will also fund service agreements, protective coatings, and accessories, provided the customer can withstand the debt load.

Another non-prime funding avenue is bridge loans, or home equity loans (HELOC). When the customer has had credit difficulties, the down payment is low, and the credit card debt is high, think home equity. The way to make the deal fly may be to consolidate the debt, include the RV purchase, and restructure the home loan. The end result may be lower monthly outgo for the customer and a done deal for your sales personnel. Again, reserve will be a non-issue. F&I will need to make a profit by selling a service agreement, protective coating, and/or accessories. The main thing is they will make a deal.

Taking time to deal non-prime

It takes time to conduct the initial interview. It takes time to verify the facts. It will take time to get an “out of the norm” lender in the mix. Funding on real estate loans can take 7 to 21 days depending on title searches and the ability to secure appraisals as needed. If this course of action is required, do not let the unit roll unless you can verify funding. Every real estate loan has a three-day right of rescission when the customer’s primary place of dwelling is used as collateral. Sometimes that is the only way of securing the sale.

Although some F&I managers tell me they could never ask someone to put up their home as collateral for an RV purchase, I believe it is our job to find options for the customers, present those options, and then let the customers decide what they want to do. The mission is to gain information so that we can secure an approval honestly, ethically and completely above board.

RV Trade Digest, October 2006