Saturday, November 01, 2008

Strengthening Relationships With Local Lenders

The lending landscape is once again in the midst of change. Many dealerships tell me that a customer’s credit and deal structure that would have been an automatic approval a few months ago is now questionable at best.

Credit scoring has changed and some lenders have exited the loan originations business altogether and pulled back to solely servicing existing loans. What does all this mean to the dealerships? It means you need to cultivate local lenders.

In the spirit of what was old is again new, the time has come to reintroduce yourselves to your local resources. When was the last time your F&I professionals went out and introduced themselves to the local lenders and especially credit unions? In many regions, the local credit unions have filled the gap in dealerships’ lending needs.

Take a second look at the credit unions in your area as well as other local resources such as local banks or thrift and loan companies. Make a list of all local lenders and make a plan to meet each manager in your town. You might meet them at a Rotary Club meeting, or you might invite them for lunch; better still, invite them to tour your dealership and meet the management staff. Remember people like to do business with people they know, like, and trust.

Strengthening relationships

Lenders support those who support them. Being a proactive business partner with a lender means that a dealership that values a lender will do business with the best interest of their partner in mind. Additionally, the dealership will adhere to the lender agreement in both the word and spirit of the agreement.

Let’s address the way business is conducted. Your lenders do not need any additional practice examining deals. What they need is to look at deals that fit their particular lending guidelines. Currently lenders are reviewing the ‘look-to-book’ ratios of dealerships very closely. Those dealers who do not have a 40 percent look-to-book ratio are being cancelled. For those who might be wondering about the term ‘look-to-book,’ it is how many applications received versus how many loans are funded. A 40 percent look-to-book ratio means that the lenders are looking to fund four deals out of every 10 applications reviewed. With the automated scoring in place, the usual amount of auto declines is 20 percent.

Sending the same credit information to multiple lenders at the same time is known as “shot gunning” deals. Though lenders know the practice is used, they do not like it. They will likely not tolerate the increase in operating cost it creates. They will either raise the buy rates or they will terminate the lending relationship altogether.

Every dealership has the opportunity to evaluate their practices and make them more cost efficient for themselves and their lending partners. I believe those that value their lenders and attempt to do business in a cost cutting method will strengthen the lending relationships.

Verify the facts of the deal

The next issue is inaccurate information being given to the lender in the first place. While we all like to believe that the information on every credit application is accurate, we must admit that mistakes do occur.

The first step to correcting a problem is to admit there is a problem. Straw purchases, dealer rebates used as down payment, over inflated values on trade in vehicles to compensate for negative equity, and I am sure there are a few more things to add to the list. When it comes to credit information or the deal structure it simply does not matter who did what. The fact is the lender did not get the correct information from the dealership…period.

When loans go into default it is the lender who discovers the problems, but most problems originate at the dealership. The solution is simple: Verify the facts of the deal. For many years I have recommended that the general manager or dealer gather a few random deals and telephone the customer to verify the elements of the deal. The telephone call could go like this: “Hello, I am the general manager of Your Town Motors. I was reviewing the deals and wanted to say a personal thank you for choosing our dealership as your _____ solution. If you have a moment I would like to ask you what you thought of our sales process.”

It is very important to listen and perhaps take a few notes. Then ask them what they think about their DVD player or another add on item and verify the cash down payment and the trade in. Finally ask if they would feel comfortable recommending your store to their friends and relatives.

Yes, this exercise takes time, but the information obtained could be invaluable in making adjustment to your processes. When the lenders know you have internal audit systems I am sure they will feel more at ease knowing they are in partnership with a proactive dealership.

Dealer Marketing Magazine, November 2008, P. 30-31