Category Archives: Finance Department

Your Key to Increasing Product Acceptance

It is human nature to resist the first offer we are presented with in nearly every circumstance. We are independently-minded and would rather select our own preferences versus being told what we need. Passively watching any presentation decreases involvement and satisfaction. That being the case, let’s acknowledge that customers clearly prefer to buy versus being sold.

The traditional presentation of information is evolving. The talking head on TV news is often accompanied by a ticker of breaking news along the bottom of the screen so you can listen or read the stories that most interest you. And often, upcoming stories are listed along the left side of the screen, encouraging you to wait for upcoming topics of interest.

With all this evolution in presentation formats, how has your finance menu presentation evolved? It is an improvement to present a piece of paper printed from a computer, but please tell me you are not still using handwritten menus. Hopefully, the menu is in full color with type large enough to be read by the customer while you present.

We live in a world of smart phones, touch-screen tablets, voice-activated cars, high-definition TVs and 3-D motion pictures. And you wonder why your customer is disengaged while watching your business manager’s paper menu presentation? Using such is the equivalent of using hand puppets to entertain high school students. It’s simply not effective.

So what are your options? The good news is there are numerous platforms available to dramatically enhance the customer experience when presented and offered F&I products and protection packages.

MenuSys offers a tablet-based presentation that allows for a sophisticated electronic presentation. Use of the touch screen alone helps increase customers’ engagement. The SmartPad from IAS also deploys a touch-screen tablet for presenting different protection packages available. They integrate a pre-interview component with an instant alert function. This increases customer engagement by having the guest use the tablet to answer a series of customizable questions. The results are sent to both the business manager and senior management.

Capturing this relevant, timely information about the customer’s preferences and habits saves time and focuses their attention in an, innovative way on the topics about to be discussed. The guest interview has always been a good practice. The SmartPad raises that practice to another level.

The final two options provide the highest level of customer engagement during the presentation process of the F&I menu.

The Impact Group in Washington, D.C., offers a software tool called Fusion. The concept of using software to generate an F&I menu presentation is not new, but the format of the presentation itself is new. With the price of large-screen TVs dropping dramatically recently, purchasing and installing a large flat-panel monitor in the F&I office costs less than the profit from an average car deal. Integrating the use of a wireless keyboard and mouse then facilitates a high level of customer engagement in the F&I process. By allowing guests to fully participate, the process provides transparency; everyone can see changes to the figures together on the large monitor in real time. Business managers are encouraged to allow the guest to take the mouse and make changes themselves. Adding or subtracting coverage or adjusting term and down payment amounts, the customer can guide the presentation to achieve the preferred payment they are seeking.

The last option is the most robust and, as you might expect, the most expensive to implement. The docuPAD system was originally designed by COINdata and is owned and operated by Reynolds and Reynolds. This desktop presentation system offers the ultimate in customer engagement with embedded videos and graphics. Like the early adopters of high-definition TV seeking out HD channels eight years ago, the system offers more horsepower than content providers can fill. Unfortunately, many of your current product vendors do not have the content in video and graphics format to maximize the docuPAD’s system for full utilization.

In the end, we must accept the fact that consumers are being bombarded by high-engagement experiences that set expectations for a wow factor at an all-time high. If your F&I menu presentation looks like a black and white TV with rabbit ears, it’s time to get in the game with a technology platform that reflects the current business climate.

Kirk Manzo
The Manzo Group

Your Sales Staff and F&I Department: The Successful TurnOver

One of the most critical and often forgotten tools in F&I success is actually the sales staff. They really can make or break your F&I department. On average, 70% of RV customers finance their purchase somewhere. Having a sales staff that can properly identify those opportunities will help protect the sale while also increasing your dealerships profits. Some simple training techniques can make your sales staff experts in turning over customers to the F&I Manager.

Recently I went and purchased a new car. Obviously, I consider myself an educated buyer and walked in with my financing already arranged as I’m sure many of your customers do. The salesperson asked me if I would be paying cash or financing the car to which I responded I would be bringing in a check. This point right here is where your sales people can really make the difference in your bottom line. He could have just responded with a “great” and moved on with my purchase. Instead, he proceeded to offer a low pressure alternative “Great, that’s fine. I just wanted to let you know that we offer very competitive finance packages right here at the dealership due to our volume with the lenders and most of my customers actually end up going through us.” He had me hooked. Of course I inquired about what kinds of financing packages they offered. He explained that his job was to help me find the best car to meet my needs and that the F&I Manager would be more than happy to help find the best finance package to fit my needs.

A good turnover is as simple as that. The salesperson could very easily have taken my check, pocketed their commission and left it at that. Instead he asked a few simple questions that created a financing opportunity as opposed to utilizing an outside lien. This opens the door for the F&I Manager to possible convert the customer to financing or at the very least sell them an extended warranty contract all while protecting the sale.

Your sales staff should also be setting proper expectations throughout the sales process. For example, what does your sales staff say when a customer asks about interest rates? Unprepared salespeople may be tempted to try and give ranges to the customer hoping that they like something they hear. They oftentimes have no base or validity and sometimes just pull the numbers out of thin air. “Your rate will be between 6.99 and 19.99.” These arbitrary numbers will do nothing to excite the customer. In fact, the customer could be completely turned off to the idea of financing through your dealership based on the salesperson’s answer. Ultimately, your sales staff will give an answer. It’s the management’s job to give them the proper answers to help protect both the sale and the profit.

So what is the right answer to that question? The correct response should re-direct the customer’s attention back to the RV and the fun they’re going to be having while also letting them know that the salesperson is not the best equipped person to answer that type of question. Keep in mind that people buy the fun not the rate. They will adjust their limits or expectations if they are truly sold on the product that you are selling. Most of the time that should be enough to re-focus the customer, however is if they do persist, have the salesperson remember these four words “subject to comfortable financing.” The salesperson should simply remind the customer that it is their job to help find the ideal RV. In addition, if this is the RV they want to purchase let’s write up the deal “subject to comfortable financing” and introduce you to the F&I Manager who can answer questions based on your particular situation.

Ideally, your sales staff should be turning over 100% of their customers to the F&I department in order to maximize profits and protect the sale. It’s not just important to turn over the customer, but to also share information that they’ve learned about the customer. Knowing that a customer is married with two kids, has a wife who doesn’t work and travels in the RV three times a year can help your F&I manager easily sell this customer based on that customer’s needs.

By having your sales staff and F&I department all speaking from the same book, you will see not only an increase in F&I profit, but also an increase in deliveries.

Written by Lorraine Mariotti

Will There Be Financing?

That’s a question which is floating around these days. Industry insider lays out the challenges ahead and says to be on the watch for new market entries.

It’s difficult to ignore the challenges the industry faces this year with reports coming out daily about lowered forecasts for vehicle sales, used-vehicle prices dropping, suppliers struggling, and stock prices for major dealer groups weakening. What’s unfortunate is the dim news includes the automotive financing side of the business, which was the saving grace for many dealerships last year.

Before the problems in the subprime mortgage industry were realized last year, the industry warned of shrinking margins, growing regulatory and legislative constraints, negative equity and longer average monthly terms. Today, the problem is much worse, with finance companies finding it difficult to securing funding for their financing activities.

The problem stems from what the subprime mortgage crises did to investor confidence, as many are pulling back from auto finance of their overall retrenchment from financial services. Losses are also mounting for several financing institutions, mainly because of rising delinquencies.

Auto Financing’s Threatened Role

Automotive financing has played a major role in the automotive retail world, whether it’s through special financing programs, dealer credit or nonprime financing. Now that role is being threatened, with a greater amount of scrutiny being placed on financing sources. For some in the industry, the scrutiny is coming from the investment community. For others, the scrutiny is coming from within, especially for those who operate as a division within a bigger organization. And while captives would seem to benefit from the retrenching, they are also under closer watch by their parent companies these days.

Technology is also playing a role, with the introduction of dealer financing platforms leading to the commoditization of auto financing. While the platforms have allowed for greater efficiencies, they have also put all financing sources on an even playing field. And in today’s tightened credit environment, being able to innovate and differentiate is definitely a difficult challenge.

The industry is already seeing the consequences, with massive layoffs for some, market curtailment for others, and tightening of credit for almost all.

The question now is, will a solid base of financing sources be available to offer an adequate set of products and pricing across the full spectrum of business? Will the rates be enticing enough to get the deals done? Will customers have to postpone their purchases until they can afford it? Or will financing be able to help lift up the dreary sales situation?

New Sources Being Revealed

Those who are in the market now and plan to be in the market for the long run will have to ride out the storm. Some current market leaders, such as Wachovia Dealer Services, Chase Auto and Fireside Bank, are actually looking to grow.

"This is a great market for us and our growth validates our market strategy," said Tom Wolfe, president of Wachovia Dealer Services.

Numerous auto financing sources have entered into the market over the last year. They have watched the market closely and are now poised to gain their share. These include companies such as Resurgent Auto in Greenville, S.C., MarkOne Financial in Jacksonville, Fla., Inspire Auto Finance in Dallas, and Sixth Gear in New York.

"We just entered the marketplace last fall and the response to our product has been strong," said Paul Chicky, CEO of Resurgent Auto. "Throughout this time we have managed to maintain lower than expected delinquencies and losses."

There will continue to be retrenchment by other sources in terms of their market reach, pricing and policies. This should be no surprise to any dealer. The cost of money is high, which is why dealers should remain in constant communication with their financing sources.

A major challenge for lenders these days is liquidity, whether it’s fueled by asset-backed securitization (ABS) or not. Asset-backed securitization, which had grown tremendously in recent years, is now a rarity these days. That’s because the investment community equates nonprime auto financing to subprime mortgage.

Lenders are finding new ways to acquire funding as evidenced by the deal struck in April by AmeriCredit and Deutsche Bank. The strength of the ABS market and the status of auto financing portfolios will continue to grow. That’s why the American Financial Services Association (AFSA) is talking to the investment community and teaching it how the auto financing industry works.

Finding New Lenders

The truth of the matter is that the automotive industry is in the best position to manage the economic challenges at hand. In the early 1990s, the auto financing industry went through its own subprime crisis. The industry has greatly improved since then. Prime and nonprime players have seasoned staffs and tested processes in place.

That’s why dealers need to visit industry conferences, as they’re a great place to find new financing sources. Additionally, dealers can check with industry associations to see if they have an updated list of financing sources. F&I magazine also publishes an annual industry directory that includes a list of financing sources. Dealers can also check with vendors, such as DMS providers or outside legal counsel. Often times they are the first to know of new market entries.

Dealers may not be responsible for the plight of the automotive finance institutions, but it is wise not to ignore it either. Remember it will be a difficult year for everyone. Some auto financing sources will be able to grow within this environment. Much of that will depend on who has the strongest dealer relationships, who has the most credibility with their shareholders, who has alternative funding sources, who has an efficient and reliable process, and who has a clear value proposition for their dealers and customers.

Marguerite Watanabe is the president of Connections Insights LLC, which focuses on strategic partnering between auto finance service providers and auto finance sources. She can be reached at

You’ve Plugged It In. Now What?

My husband and I recently installed a new water heater in our home. Now, I don’t know much about water heaters, but the guy at the store assured me that the unit we bought was the super-duper, top of the line deluxe model. So, needless to say my husband and I were very disappointed when the plumber installed the thing and the hot water never came. After multiple visits (and numerous excuses) from the plumber, we learned that our deluxe model water heater wasn’t worth a darn because some lines got crossed during installation. Apparently, even the highest quality water heaters need to be connected to the water line to make the water hot. Go figure.

Oddly enough, my adventure with the new water heater reminded me of my recent trip to the NADA convention and the grand unveiling of all the newest and greatest nifty gadgets peddled to car dealers. This year, I was pleasantly surprised to see how many new products out there are geared toward dealer compliance. And, I was delighted to see how many dealers were taking the compliance initiative and investing in these products.

But, like my scald-o-matic water heater, these products and programs are only as effective as their installation. I’m not talking about the computer folks and the IT crews who plug in the wires and push all the buttons to make things happen. What I am talking about is a commitment from management to encourage the cultural changes that will help the new products and procedures take root. You’d be surprised how often I see dealers who don’t ever get the full benefit from a good investment in a compliance-conscious product because they don’t follow through and ensure that the program is properly integrated into dealership operations.

One of my favorite compliance review stories involved a dealer that assured me that it was impossible for his employees to be packing payments because his dealership had purchased a menu software program. But, when I met with the employees in the finance offices, they told me that they weren’t using the menu software the dealer bought. In the words of one employee, “Yeah, I know that were supposed to be using that stuff, but it’s really not my style.” In other words, the dealer bought a fantastic menu-selling program, but had not successfully integrated it into dealership operations. (And yes, for the sake of this article, I’m ignoring the fact that, although menus are a fabulous compliance tool, they’re no silver bullet for a dealer’s compliance woes or packing claims).

So, how can a dealer get the most out of a compliance-based product or program?

For starters, follow-up and make sure that your employees are actually using the program and that they’re using it properly. Just like the story above, dealers shouldn’t assume that employees are using a program just because they’ve bought it. After all, employees may be hesitant to break old habits that have served them well in the past.

Make sure that your employees understand the changes you’re making. If you bring your employees into the “big picture” and let them know that the changes they make today could have long-term payoffs, they will be much more willing to stick with the program.

Don’t forget that there is no one-size fits all compliance program. No matter how wonderful the program you bought is, you’ll need to constantly reevaluate your situation and see if the program is getting the job done. After all, compliance is the ultimately the dealer’s responsibility.

*Emily Marlow Beck is a lawyer in the Maryland office of Hudson Cook, LLP. Prior to starting her legal career, she spent years working in a family-owned dealership. She can be reached at 410-865-5438 or by e-mail at

Your F&I Office Can Influence Customer Retention

There are many strategies that have developed over the past several years to positively influence customer retention. Customer loyalty programs with a points reward system and special discount pricing on select dealership services provide some level of success. There are also discount coupons that can be used for savings on the purchase of the customer’s next vehicle. In the end, there are three key areas you should focus on to get your customers to come back and buy from you again and again.

The first is to make sure you maintain a high penetration on your service contracts for both new and used vehicles. Maintaining over 50 percent penetration on parts and service agreements is the first standard to establish at your store. Make certain your metrics are designed to ensure this outcome. Compensation programs for your entire staff, salespeople, sales managers and F&I managers must reflect your commitment to this outcome. Why?

Nothing will kill your next sale to a current owner like having to inform them that you have diagnosed the problem with their vehicle and the estimated cost of repair is $1,258! Oh and by the way, we will need to keep the vehicle overnight since the part is not in stock. Compare this with your service manager informing the customer that their rental car is ready (at no additional cost) and that the $50 deductible has been waived since the work is being completed at the same dealership where they purchased the vehicle.

The second strategy to implement is a pre-paid maintenance program. NADA concluded that buyers establish their vehicle maintenance habits during the first 18 to 24 months of ownership or during their first six to eight maintenance visits. The numbers go on to further indicate that a small percentage of people currently return to the selling dealership for routine maintenance. The numbers are often well under 50 percent.

The interesting element as it relates to customer retention is that almost 70 percent of your service customers will strongly consider purchasing their next vehicle from your dealership. The key is to set your program up to make the sale of the pre-paid maintenance (PPM) coverage easy. Price the product appropriately. Remember the goal here is not to jump-start PVR on your back end (that is why you offer service contracts) nor is it to bolster immediate profits in the service lane. The strategy is customer retention.

Many vendors currently offer self-implemented programs that can be handled for a small administration fee and which offer claims processing via the Web. Approvals for repair orders are generated easily and the process appears seamless to the customer.

The third retention strategy is one that appears to come and go with favor every few years, depending on the brand you sell—leasing. While acknowledging that the most successful leasing programs are in part underwritten by the manufacturer, ask yourself this question. Out of the last 10 deals your desk worked how many were leases? Two, maybe three? Why not consider offering a lease to every new car buyer? The option could be included on the first or second pencil or even both. While not every buyer is going to take advantage of the lease offer, how many might?

In menu selling, the old adage is to simply present 100 percent of the products to 100 percent of the customers 100 percent of the time. What might happen to your lease penetration if you applied this same strategy for lease purchase options?

Bear in mind that if you increase your lease penetrations, you will need to reconfigure your F&I menu to maintain back-end PVR. The product mix will need to include a security recovery system as well as a comprehensive paint and fabric program. The PPM will also help F&I profit and should be priced with that in mind, since the retention strategy will be accomplished by using a lease. Inclusion of a tire and wheel program would also help keep back-end profits up.

Replacing the $1,000 you normally earn on a service contract from a conventional finance transaction is going to require some work. Strategize with your current F&I product suppliers to create a winning combination of protection options that allows you to make up for the lost revenue from your top-grossing product.

Kirk Manzo
The Manzo Group

What Happens to Your Customers After the Sale?

When I started in the retail car business, over 24 years ago, the F&I office was simply a place in the dealership that you took your customers to sign all of the paperwork that essentially finalized the deal. Having started in the industry as a salesperson, I really didn’t have a clear understanding of what exactly took place in the small office where I escorted my customers. After a successful sales tenure of approximately two years, I was offered the position of F&I manager. Being young, aggressive, and wanting to move up within the ranks of the organization, I gladly accepted it.

Within the first ninety days, the dealer sent me to a week-long F&I school where I learned the overall basic scope of the business and job description. I remember so clearly spending a lot of time reviewing the laws, rules, and regulations along with how to disclose the finance and leasing contracts. We also generically reviewed the extended service contract as well as credit life and accident health contracts. As far as the actual sales process regarding how to present the products to the customer and overcome objections, there was very little emphasis placed on this valuable step. As you can probably imagine, there was absolutely no time spent on how to follow-up with the customers who didn’t purchase an extended service contract at the time of sale. Needless to say, times have definitely changed.

Most of the F&I training companies today still place a lot of emphasis on the laws, rules, and regulations, including proper disclosure to the customer as well as menu presentation and the ability to overcome their objections. In today’s economy, however, there’s a lot of focus being placed on the F&I departments regarding the sale of products and generating profit.

I have met a lot of F&I “power closers” in my career, however, I have never met anyone who possesses a products closing ratio of 100 percent. Even the very best salesperson doesn’t sell to every customer. So I ask you this question: What happens to those customers who leave your dealership without purchasing your products? The answer: They are being solicited by third-party warranty pirate companies and many are purchasing from them. That means you are missing this valuable income opportunity and, just as important, you are missing out on additional parts and service revenue. Your goal is to tie your customer back to your dealership as often as possible.

So how do you accomplish this? You scour your customer database, looking primarily for those individuals who still qualify for an extended service contract after the sale. Once this group has been identified, mail each prospect a letter and offer them a second opportunity to do so. I strongly recommend that you personalize each letter to the customer. This can be achieved by including their name, address, date of purchase, year, make, and model of their automobile. This is time consuming; however, the results have proven to be very successful and profitable. Don’t allow anymore of the third party companies to take control of your customers. Start marketing to them today.

Tom Gray is the president of F&I Re-Marketing Solutions. For more information visit

Where Is The Income In F&I?

The profit streams in F&I are once again changing. There is a lack of reserve and the lenders are limiting the traditional, F&I products and services. This can be traced to lack of cash down payment and the fact that a good portion of customers are suffering from a negative equity position from the beginning of the financial transaction. These problems, however, are not insurmountable.

There is nothing wrong with the level of income in F&I that more cash involvement from the customer cannot cure. Who needs to ask for this investment? The line of communication between the dealership and the customer begin with the sales consultant.

Thirty years ago when the finance department was young, the sales consultants were all educated to work the customer for cash down. In fact the sales department profit was defined by the amount of cash down the sales consultant and sale manager were able to obtain. The rule was simple; the gross profit of the deal was equal to the initial investment by the customer.

Time is the catalyst that brings about new strategies. In the auto industry, those changes were zero down, long-term financing, which created huge amounts of negative equity for many customers. Along with the importance of cash down, the products of the F&I office have changed. Credit life, accident, and health insurance are almost non-existent, those dollars were switched long ago to protective coatings that maintain the appearance of the vehicle.

The F&I office will become the accessory center.

In addition to the financing being tighter, deals are fewer, and the importance of maximizing the transaction has never been greater. Customers are still looking for dependable transportation. The heyday of SUVs is over. American customers are looking for fuel-efficient vehicles, but that doesn’t mean they don’t want to accessorize their rides. We are accustomed to having high technology, convenience, and stylish looking vehicles and we will spend money for things we want; and we want bells and whistles.
Best opportunities

A great use of those first few minutes in the F&I office could be to give the customer a simple one page sheet of things that could be included in the financing as approved add on items, such as cargo organizers, DVD players for the back seat, iPod/MP3 player recharging stations, special wheels, pin striping, tinted windows, and enhanced security systems.

Make up one page for sedans, one for trucks, and one for SUVs. Use different color paper and keep the list limited to the most commonly requested items in your market place. The first step in capturing these accessories dollars is to recognize that your customers are already making these purchases, they’re just doing it elsewhere. Accessorizing is big business!

This is a great way to use those first few quiet minutes when the customer and the F&I professional begin the F&I process. The list could be viewed as the F&I professional is entering the deal information or checking the spelling of the names.

Selling additional accessories must be done after the commitment to purchase the vehicle but before the financing is arranged. Keep in mind that nothing will be added to the vehicle until the funding is secure and the dealership is paid. You can work out those details between departments.

In these times flexibility is the key to growing the income and building happy, loyal customers. Keep the process simple and keep the customers coming back by becoming a one stop shop for all the things that make a fun driving experience.

Jan Kelly is the president of Kelly Enterprises. She is a sales trainer and consultant, convention speaker, and writes frequently for industry publications. For information about training opportunities or joining one of our F&I 20 groups, call 800-336-4275, or visit

Who Pulls the Credit Bureau?

I n many dealerships, it is the task of the F&I manager to complete the credit interview, observe the customer as he complete the credit application, and then excuse himself as he goes into yet another office to pull the credit bureau. Not only does this process leave the customer alone for an undefined period of time, it is also wasting valuable time.

I realize that the processes of the metro areas differ from those of the rural areas. We must be aware that everyone’s time is a valuable commodity and that once it is spent it can never be replenished. Therefore being respectful of time spent is a plus regardless of where your business is located.

During the interview

Let’s review the practice of the sales consultant obtaining the credit application. I am most familiar with this process, and it has proven itself to be time efficient. Let us presume that the sales consultant during the interview process has uncovered that the client has experienced some credit challenges in the past. The sales consultant should take the time to complete a credit application.

The sales consultant should then take the completed documentation to the sales manager, and the sales manager should run the credit bureau and determine the extent of the credit difficulties. Perhaps the F&I manager will need to be brought in to complete a credit interview.

F&I manager discovers the reasons

I am convinced that the sales consultant should not be the one who makes inquiries about the credit history. History has shown me that when the sales consultant learns of the credit difficulties, the level of enthusiasm for the deal wanes followed by a curtailed vehicle presentation. The result is often a lost deal, a discouraged sales consultant, and no productivity for the balance of the day.

It is far better to have the managers receive all the negative news; perhaps they have a way to make lemon aid out of the basket of lemons that sits in front of them. As a manager we should want each of our sales consultants greet every prospect with a high level of enthusiasm and expecting to make a deal which is good for all parties. Often when a sales consultant is privy to the credit score, the level of enthusiasm for the deal plummets to the level of the credit score. The winners focus upon the possibilities, of the deal. They find a way to make most of the deals. Yes, some require additional work. Those are the ones that develop life-long customer ties.

Negative credit does not remain status quo

Typically, customers who currently have credit difficulties work themselves out of the current circumstances. After time they become mainstream finance customers. Where they choose to purchase their next vehicle depends on how they were treated at the last dealership they purchased from.

Leaving customers in a face-saving environment is key in building customer retention. Provide an office with a closed door that will ensure privacy when the past credit issues are being discussed.

It all begins with who pulls the credit bureau

The best practice is to have the sales consultant obtain the credit application. Have the sales manager pull the credit bureaus. Utilize the power of two when it comes to structuring the deal for a lender, and use the power of two to conduct the credit interview.

Leave the sales consultant in a position where he can share his enthusiasm for the deal with the customer. Enthusiasm will locate an open window where a door is closed.

World Of Special Finance Magazine, June 07 Issue, P. 51
To learn more about Jan Kelly or Kelly Enterprises visit or call 1-800-336-4275

Why We Need a New Auto Finance Paradigm

In the current economic climate, strong dealerships are surviving by finding ways to increase profits and streamline operations, and the loan approval process should be no exception.

If you think the subprime mortgage crisis created problems for the U.S. economy, get ready for the sequel: Slower job and wage growth. Gasoline prices on a non-stop climb. A credit crunch that has caused banks to hoard cash as insurance against potential losses on securities backed by subprime and other mortgages.

Economists fear these economic ills may carry over into 2009, when a second wave of disruption is expected to take hold as “option” ARMs which originated during the last gasps of the real estate boom begin to reset. (ARM is a mortgage that typically allows the buyer to choose among four payment options each month, including a payment against either the principle or the interest.)

What has been the impact on the auto industry? The news to date hasn’t been great: Although the past eight years have seen the best auto sales in U.S. history, JD Power and Associates reduced its 2008 retail sales forecast by 300,000 units and dropped its overall forecast by 4.8 percent to 14.95 million vehicles (16 million is considered a “healthy” market).

On the special finance side, the percentage of subprime auto loans more than two months delinquent hit a 10-year high in January 2008, according to Fitch Ratings, continuing a trend established in the last half of 2007. TransUnion, meanwhile, predicts auto delinquency rates will increase as much as 33 percent by the beginning of 2009.

Assessing the situation

Together, the subprime mortgage crisis and the public’s reaction to it have created a “perfect storm” of threats to the overall economy and the auto finance industry. A significant portion of the population fears spillover from the subprime mess, with one in three people being extremely or somewhat concerned their credit may be at risk, according to a recent survey.

Even with these storm clouds on the horizon, transportation is a necessary expense and most Americans still view cars as a basic necessity. In a sense, the nation’s economy literally runs on cars. As some families begin to prioritize bills, their car notes often become a higher priority, and auto industry watchers note that borrowers would rather give up their homes and seek a rental than default on an auto loan and hand over the car keys.

Rather than forgo cars, many consumers will opt to choose a comparable used model instead of trading down. Whereas with traditional lines of lending, they might have first considered brand-new BMWs, tighter credit lines may lead the same consumers to select ’06 models with 25,000 miles on them. Less costly cars might not be their first choice, but they might fit their budgets better.

And there’s still a huge market for auto loans. Approximately $575 billion in loans for new and pre-owned cars are made annually, according to the National Automotive Finance Association. What can the nation’s nearly 22,000 new-car and 15,000-plus BHPH dealers do to manage risk in this economic environment? Avoid underwriting mistakes. In 2006, about $50 billion in auto loans were made to subprime borrowers, according to J.D. Power and Associates. The real number might be closer to $100 billion. Unlike subprime mortgages, most of these auto loans carry fixed interest rates and have no introductory “teaser” periods.

Still, it’s clear that some auto lenders loosened underwriting standards in 2006 and 2007, increasing the likelihood that borrowers who couldn’t really afford loans could still get them. This only fueled the acceleration of delinquencies. As a result, dealerships and auto lenders must now focus on ways to maximize liquidity and manage risk.

The new paradigm

BHPH dealers have begun to follow a trend set by new-car dealerships. They’re seeking new-enterprise business best practices and process advancements that improve cash flow, profitability and efficiency — business practices that can help them with accounting, cost analysis, loan portfolio management and legal and regulatory compliance. An efficient new auto-loan paradigm would allow dealerships, banks, credit unions, hedge funds and other financial institutions to come together to securely evaluate, package, price, sell and purchase asset-backed debt.

New technologies have emerged that do just this while helping consumers by widening their car-buying and financing options, thus enabling dealers to seal deals more quickly.

What do dealers need in this regard? A transparent, stable mechanism that enables financial institutions to perform due diligence on a dealer’s loan portfolio, make an offer, write a contract and close and fund a transaction without ever setting foot in a dealership. Such a platform would prescreen dealers and financial institutions, then admit them to list or find loans to buy and sell online. Financial institutions could review loan documents in a secure document management environment, while dealers’ and customers’ privacy would be maintained, because documents are shared only with consent. The documentation process would be automated, from pickup and scanning, to the return of originals within 72 hours, to archiving.

Once due diligence is completed, the Web platform would keep track of each step of the contracting and closing process and provides a venue for communication throughout. Proceeds from the proposed transaction would be placed in an escrow account and released when the title is received by the investor. Putting the entire process online compresses the amount of time and energy it takes to ensure compliance and complete a portfolio sale, making life easier for everyone involved.

The strategic value of a new paradigm should not be overlooked. Many dealers wait to package and sell loans they’ve originated until they are strapped for cash to fund urgent business needs. By more aggressively managing their loan portfolio, they receive top dollar. Access to more cash when they need it will help them maintain a competitive edge.

Dealers can gain strategic advantage if they are able to offer a portfolio for sale at any time, set a minimum price and automatically evaluate how that price compares with similar portfolios traded in the past. Once a price and timeline have been set, they should be able to monitor bids as they come in, which would allow the dealers to respond accordingly.

Auto loan transparency is essential, too, particularly as dealerships face increased scrutiny by state and regulatory agencies. Investors, should be able to pre-select the loans they’re interested in buying based on any number of parameters. Loan terms, APR, amount financed, age of the vehicle and more all should be considered. Using these parameters, investors can identify loan portfolios that match up. This enables investors to choose to make offers only on loans that meet their criteria, and do so instantly.

The economy is in dire straits, but American consumers are resilient. Consumer spending amounts to about 70 percent of our $14 trillion economy, and car sales are the largest segment of the retail market. Any solution that streamlines and efficiently manages the auto-loan process will help dealers and consumers alike.

Mike Sheridan is the founder of Global Debt Network Inc. and president of GDNAuto, based in San Ramon, Calif. E-mail him at

Weathering The Storm With Automated Negotiation Tools

Imagine a seamlessly executed auto sale that eliminates walk away points, caters to each customer’s specific loan requirements, and accelerates the closing process. Then imagine at the same time matching even the most challenging loan requests at the same time, dramatically increasing acceptance rates, and your bottom line. This is quickly becoming a reality for many dealers.
A dismal forecast

Credit turmoil, rising fuel costs, and a softening economy all add up to a gloomy forecast for automobile dealers. It is imperative that dealers maximize sales opportunities by offering relevant and timely offers. This is often the critical to solidifying a deal or watching a potential buyer walk out the door. Delivering the right product at the right time is key in any market, but even more so today. Automated negotiation and instant credit decisions are innovative, yet proven, strategies designed to help dealers provide the best financing offers to a shrinking customer-base.

Automated negotiation and instant approvals

Making smart lending decisions involves much more than just mitigating risk. In today’s market, dealers must partner with lenders to make personalized offers based on what is most important to the customer: interest rate, loan term, trade-in value, and payment amount. Automated negotiation empowers dealers to quickly personalize offers and avoid walk-away points. Dealers currently working with lenders that have an automated negotiation system in place have a significant competitive advantage—immediate access to accurate and timely loan information resulting in increased acceptance rates.

Making the right offer is just half the battle. In these competitive situations, having the right offer, at the right time, is critical. Prescreen-of-one allows dealers to instantly approve customers with a simple swipe of a driver’s license. A prescreen solution enables a dealer to prepare a prioritized list of financing options, literally in seconds. When the potential buyer returns from the test drive, they can be taken immediately from the lot to the financing office without delay and provided with their personalized options.

Automated negotiation and prescreen-of-one significantly increase acceptance rates and solidify offers for dealers. Combined, they give dealers the tools needed to attract and book customers.

Tom Johnson has 19 years of experience in designing, implementing, and managing technology solutions in banking and education for Zoot. As vice president of product development he is the chief idea generator and develops new product concepts. Tom can be reached at