Nov. 8, 2010 – The state of retail lending

LAS VEGAS — As the nation’s economy begins to show some upward trends, retail lending is slowly becoming easier to come by. Lenders are growing anxious to loan money to boost their profits, and approval rates are improving.

“Right now we’re at historically low rates, and investors are dying for some yield on their investments,” said Jeff Williams, senior manager of sales and marketing for American Honda Finance Corp. Williams and four other members of powersports lending companies informed dealers on the state of financing during the “12 Ways to Improve Retail Lending Approval Rates” panel at Profit Xcelerator, Powersports Business’ dealer education conference & expo. The event, held Oct. 15-17 at Las Vegas’ Red Rock Resort & Casino, drew approximately 300 members of the industry, many seeking ways to improve their operation’s profitability. The retail lending panel was one of 15 different seminars and panels at Profit Xcelerator, each of which dealt with different dealership profit centers.

The panel’s retail lenders in general see a much more stable lending environment than in the recent past, with some more aggressive lending possibly on the horizon.

“Certainly the powersports loan opportunity represents what I think most of us consider to be a moderate to good-spread risk type of business,” said Bob Byrne, a ProfitX panel member and vice president of manufacturer sales at Sheffield Financial, “and I think we’re going to start seeing, you’re going to start seeing, more of an aggressive stance.”

Where we are now

Retail lending dipped substantially in late 2008 and 2009 as lenders pulled back as unemployment rates and mortgage foreclosures quickly rose.

“I think all lenders at that point really made some quick reactions to protect their portfolios,” said panelist Amy Kneeland of GE Money.

Lenders weren’t getting the money they needed, and, therefore, weren’t ready to loan it out to others.

“It just made it a very difficult climate for lenders to find reasonably priced money that we can turn around to you as well,” Williams said.

But as this year has progressed, the lending environment has begun to change.

“For many in the powersports industry, ’09 was about uncertainty,” said Kevin Walsh, a panel member and senior vice president of client development, card and retail services, at HSBC – North America. “2010 is more about stability. The unemployment hasn’t improved, but it hasn’t worsened either.”

Because 2010 has been more stable, lenders have increased confidence in loaning money.

“They’ve been able to loosen up some of their underwriting as they’re learning maybe some of the losses aren’t quite as bad as they were expecting right out of the gate,” Kneeland said.

“As losses continue to improve, multiple lenders have been able to make some changes in the past year and hopefully as we go the next six, 12 months, we’ll continue to see some of the progress and be able to make some adjustments as we move forward,” she added.

In fact, the market has already improved for customers who do get approved.

“There’s extremely low rates out there because the cost of loans has gone down, and the ability to get money is greater,” Williams said.

Lenders have recognized that consumers are letting go of some of their discretionary money and investing in new purchases again.

“I think most economic forecasters would agree, and I think all of us would agree, in our business that we’ve probably bottomed out,” Byrne of Sheffield said. “We’re at the bottom of the curve. I think the trends are starting to come back where there’s a little bit more of an aggressive approach to retail lending.”

But there are still some concerns.

“Underemployment is a critical aspect we’re really looking at,” Williams said. “When somebody who’s making $75,000 a year lost their job and all of a sudden they’re making $35,000-$40,000 a year, that makes an impact on disposable income and their ability to buy a motorcycle, powersports product or whatever that is.”

Byrne added, “I think the key is that we have to continue to see the powersports buying consumer to continue to dig back from underneath the debt load they have experienced.”

As the customers do return, lenders say they are ready to invest in new loans.

“What we do see are those people that are willing to take a little bit of a risk, and we need the ability to take a little bit of a risk on them,” Williams said.

Used unit financing

While used sales are becoming more important to dealers as consumer spending is down, financing for preowned vehicles is being sought, but often not found. A few dealers asked the panel what solutions there are for those seeking used products.

Most on the panel said they work with the OEMs and can only offer OEM-approved loans, including on used models.

“Being tied to the OEMs and the OEM-sponsored programs kind of limits us,” Byrne said. “Obviously the OEMs focus on subsidized programs that we have partnership relationships with that are focused obviously on selling new product. We don’t have standard programs or non-subsidized or non-supported sales through the dealerships, but some of the OEM programs do offer used.”

GE Money offers financing for used vehicles up to six model years old through OEM programs, and it’s trying new options. “Right now we are actually running a pilot (program) where we’re taking in other manufacturers as well under the Polaris program,” Kneeland said.

FreedomRoad Financial has options for financing used, especially for Ducati and Triumph dealers. “We do look at serving the customer, not only the product,” said Tom Collins, a panel member and executive vice president and managing director of FreedomRoad Financial.

Used vehicle loans have higher rates and shorter terms, but they are available.

All five lenders said lenders as a whole are looking at better used vehicle lending practices. It’s something the auto industry is interested in as well as their used sales increase. PSB