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A slightly brighter lending picture

By Neil Pascale and karin gelschus
The percentage of new unit consumers who are being approved for financing has increased from earlier this year, according to a national dealership survey. However, the increase has been marginal and the issue remains a huge sales obstacle for many dealerships.
The F&I survey was conducted by Powersports Business, which contacted 25 metric and European dealers in 17 states in August. It not only delved into consumer finance approval rates but looked at how dealerships’ retail lending partners have changed as well as if F&I personnel have been impacted by dealership layoffs.
Among the key findings:
Fifty-one percent of consumers who apply for financing to purchase a new unit are getting approved, the survey found. Dealers said that percentage is 3 points higher than in the first quarter of this year.
Lending restrictions enacted late last year and early this year by national and regional finance institutions have resulted in changes at the dealership. However, in most cases dealers are relying primarily on the same type of lender as they did a year ago.
The biggest change in lending seems to be happening at the local or regional level with banks and credit unions. Dealers’ business with these institutions have changed more so than with OEM lenders (Honda, BMW, etc.) or national lenders (Sheffield Financial, GE etc.). In some cases, dealers are doing more business with local lenders and in other cases drastically less financing with these area providers.
F&I personnel primarily have not been a part of in-store layoffs. Dealers have primarily targeted other departments with staff reductions, the survey found.

Approval rates
The approval rate percentage found in the Powersports Business survey is consistent with what Polaris Industries announced earlier this summer. At the time, Polaris officials said 48 percent of its consumers’ retail loan applications were approved by one of the company’s three retail credit providers, HSBC, GE or Sheffield Financial. Polaris also noted the approval rate for its second quarter was 4 percentage points higher than the first quarter.
The national dealership survey found a huge disparity in approval rates. Thirty two percent of dealers said their approval rates were 60 percent or higher. However, another 30 percent of the dealers said their approval rates were south of 40 percent.
“Today we had a customer with 800 beacon score turned down,” said Scott Britt, president of Britt Motorsports in North Carolina. “On one Saturday in June, we had 24 straight turned down applications before one approval. Currently a norm of about 11 out of 15 applications are being turned down.”
While Britt Motorsports is seeing its approval rates decrease, that isn’t the case with the majority of dealerships, the survey found. Sixty percent of dealers are seeing either better or similar approval rates now than compared to the first quarter of 2009.
For Chris Cuomo, president of Velocity Cycles in Mechanicsburg, Pa., it’s not the approval rates that have changed so much as the type of consumer. Cuomo said his dealership is mostly only seeing consumers who have either high or low credit ratings and the ones in the middle have become a rarity.
When could things change in terms of approval rate percentages?
A national survey of banks and U.S. branches of foreign banks by the Federal Reserve in July found roughly one-third of respondents expect standards to remain tighter than their longer-term average levels for the foreseeable future. Another one-fourth expected a return to longer-term average levels in 2011. In that survey, banks were asked reasons for tightening their credit standards or loan terms. Fifty percent of the surveyed banks said the uncertain economic outlook was “very important.”

So who do dealers rely on the most to be their primary lender: the OEM, the national lender or a regional or local provider? It varies dramatically from store to store, but of those dealerships who went to one type of lender for more than 50 percent of their retail loans, most often they rely on national lenders like Sheffield Financial or GE. And that remains virtually unchanged from past years, despite the changes in the retail lending environment.
That doesn’t mean, however, that dealers have not seen change in the types of retail lenders they’re using or how often they’re using them. Only 40 percent of dealers said their lending sources have not changed in terms of what types of lenders they’re using or the frequency in which they’re using them.
The biggest change — for better or worse — is appearing at the local or regional level, the survey found.
Greg Kirn, F&I manager of Action Power Sports in Waukesha, Wis., says the store is using an OEM lender more often now because of the loss of a regional finance provider.
The loss of local lenders has been experienced elsewhere as well. Jim Faiella, dealer principal of Peacock Ltd. in Baldwin, Mich., said his dealership saw more tightening of standards by local lenders than their national competition. As a result, the dealership is doing much less consumer financing locally than a year ago. Overall, close to 30 percent of dealers said they’re doing less business with local or regional financial institutions now than in the recent past.
Of course, that’s not the case with all dealers.
Sharon Dixon, general manager of Bay Cycle in Bay City, Mich., says the dealership relies on local financial institutions for approximately 40 percent of their consumer loans. “Whenever we have an opportunity or a door opens, we make the phone call and try to get the credit unions in here,” Dixon said.

Staff changes
Who is handling the credit applications and the F&I products largely has remained the same despite significant changes in dealership staff sizes, the survey found.
Of the dealers surveyed, 56 percent have had layoffs in wake of reduced sales. However, only 20 percent of dealers said they have laid off or changed the personnel who sell F&I products.
Rick Nakagaki, chief operations officer at Eastside MotoSports in Bellevue, Wash., is one of the dealers who has seen changes in staff levels. Nakagaki, however, has not made cutbacks that impact the F&I staff.
“If that’s the place where you’re going to cut, it’s the wrong place, I think,” Nakagaki said. “We offer the same products to every customer that walks into our F&I office. We can’t stop that because it’s revenue. It’s customer service. It’s the whole thing. We have to keep it going.
“All of those products are very important to us,” he said of the F&I services, “but having the paperwork done properly is paramount for us.”
For other dealers, staff reductions mean a change in who is doing that paperwork.
Britt says previously each F&I manager had one person performing clerical work in support of F&I?sales. But with the store’s declining sales, it was forced to make staffing changes. One of those changes means the F&I?personnel now take care of their own paperwork.

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