By Neil Pascale
One hundred and sixteen billion dollars.
That’s just one number that defines the impact the credit crunch of 2009 had on the retail world. It is, in total, the difference in U.S. consumer credit at the end of September compared to January 2009, when credit standards had already tightened considerably as the finance markets reeled from the staggering U.S. mortgage debacle.
It is not a number that can be applied only to the powersports world as it reflects all U.S. retail markets. But certainly the industry’s new unit retail sales plunge of 2009 — some 450,000 units strong through September — had something to do with that $116 billion decline in consumer credit.
Officials with some of the industry’s largest consumer lending companies believe the year of the credit crunch is not likely to be repeated in 2010. In fact, they point to a much more stable year in consumer lending and possibly a much improved one.
“I think what happened in 2009 is you didn’t see the qualified buyer show up,” said Jack Snow, CEO of Sheffield Financial, one of the industry’s largest consumer lenders. “I think the qualified buyers are going to come back in 2010, so you’re going to see a dramatic increase in approvals.”
Others point to more positives: The availability of funds for finance companies is much improved over a year ago and the cost of those funds also is better. Recently reported lending approval rates by Polaris Industries and Arctic Cat certainly reflect that.
However, that doesn’t mean there are not obstacles remaining in the lending sector.
New federal regulations affecting credit cards in 2010 could potentially reduce fees and revenue for finance companies, which in turn are likely to be less interested in lending to higher-risk consumers. That’s an especially trying possibility for certain industry sectors, including the sport bike market.
Plus, traditionally high unemployment throughout the nation continues to be a concern for lending companies. “For lenders, that’s a big deal,” Jeff Karls, a vice president of marketing for GE Money, said of the nation’s unemployment rate, which recently topped 10 percent and was at a 26-year high.
“Unemployed consumers have a reduced ability to repay credit accounts, so a rapidly rising unemployment rate, which will drive loan losses higher, creates less confidence for lenders even with high credit quality consumers.”
Tom Collins, executive vice president and managing director of FreedomRoad Financial, echoed those concerns. “My No. 1 concern going forward is the unemployment rate,” said Collins, whose company provides lending to Ducati, Triumph and Indian Motorcycles consumers.
Even with those higher-end brands, Collins finds the effects of the economy constantly popping up. He mentioned two calls he recently fielded as examples. The first call dealt with a consumer who had a perfect credit score but had lost his job three months ago and now is seeking a way to extend his payments without damaging his credit score. Another call was from an unemployed consumer who had already used his entire 401K to pay off bills and now, facing more bills he could not pay, was asking the credit company to pick up the motorcycle.
“And we see it everyday,” he said of those scenarios.
Despite the lingering effects of high unemployment, approval rates for powersports cosumers have been improving, according to a number of reports. Arctic Cat CEO Christopher Twomey recently told Powersports Business that the manufacturer has seen nearly a 50 percent increase in the approval rate for ATV and snowmobiling financing compared to earlier this spring. Polaris Industries has said its approval rates have climbed 8 percentage points from its third quarter compared to its first quarter.
Karls said GE Money’s approval percentage rates also have improved.
“Our approval rates are pretty much on par with where they were a year and a half ago,” he said.
So what happened some 15 months ago when consumer lending suddenly tightened?
“The general availability of funds in the fourth quarter of 2008, for everybody, really shrank,” Karls said. “So everybody in the market was trying to figure out, ‘Where should I deploy the funds that I have?’
“They’re a higher cost than they use to be. My losses are generally going up. Profitability was being hurt. So I think everybody was curtailing their lending. Everybody was being pretty cautious, trying to figure out where the world was going.”
That concern was heightened because a usually predictable consumer group — those you could rely on paying their bills — suddenly became unpredictable.
“A lot of the indicators that lenders traditionally use weren’t working like they used to,” Karls said, noting for example the once-upon-a-time slam dunk, high credit score consumer. Loan defaults by that group and others became much more widespread. Increasing unemployment obviously was one reason for that but Karls also believes many consumers had artificially propped up their credit scores. “In some cases they were liquidating home equity to pay their bills,” he said, “so they looked better than they actually were.”
American Honda Finance, in a statement to Powersports Business, said the amount of credit extended by Honda Finance in the coming year will be similar to 2009 and 2008. Honda also said of the applications its receives, more than 75 percent are approved. “This approval level is consistent with prior years and we anticipate no change in 2010,”?according to the statement.
Snow of Sheffield Financial notes the company’s approval rate, nor how it grades consumer applicants, did not change as much as simply the type of consumer it dealt with. Snow says in 2009 the company for the first time in its history had more than 50 percent of its applicants considered subprime under federal government standards, which defines such consumers as those having FICO scores of 660 or under.
Collins of FreedomRoad Financial also has seen the dramatic change. He notes the company has as many collection issues with Tier 1 consumers — those with the highest credit scores — as Tier 5 consumers, those having the lowest credit scores. That could be due to the number of Tier 1 consumers that FreedomRoad deals with, but it also reflects the impact of the troubled economy.
A key issue going forward for the industry could be the effect of new credit card regulations and how that trickles down to the credit-challenged consumer. The new regulations are part of the Credit CARD Act, a sweeping reform package that restricts what kinds of rules and fees finance companies can place on credit card-carrying consumers. Those regulations are currently scheduled to be implemented in February although Congress has debated moving that timeframe up.
The Credit CARD Act has far-reaching implications, one of which finance company officials believe will stretch to credit-challenged consumers. Because the act could reduce credit card-associated fees and thus shrink revenues, finance companies will likely be less interested in lending to higher-risk consumers.
“One of two things will happen,” Snow said of the lower-FICO scoring consumer. “They won’t get bought or the OEM’s costs will go significantly higher” to subsidize the finance company to take the risk to lend to such a customer. “Everybody is trying to save every dollar they can. So that customer is going to be difficult to buy.”
Karls of GE Money agrees.
“If you don’t have the revenue to cover those losses, you really need to closely manage your proportion of higher-risk consumers,” he said.
Still, the likelihood of having a stable year — if not an improved one — in regard to consumer lending appears strong.
“I don’t think we’ll ever be back to the sort of heydays of 2006 and 2007 when I think the pendulum probably swung too far on who we were allowing to have credit,” Karls said, before again noting the positives in the lending market.
“I think all the financial players’ access to funds is pretty good. The cost of those funds is fairly reasonable at this point, if not good. And lenders are finding creative ways to lend responsibly. Our shift to installment lending for example allows us to structure loans a bit more, getting consumers approved and into a credit situation that will work for them and for us.”
Assuming the economy continues to head in the right direction, Snow of Sheffield Financial also sees positive gains in the consumer lending sector.
“A lot of the qualified buyers stayed at home and are just now starting to come out and shop again,” he said. “I think that’s why you’ve seen the approvals kick up now and I think that will continue in 2010.”
Collins even sees the likelihood of more players entering the consumer lending market in the second half of 2010. “I feel lot of buzz that people are looking at this space and saying there’s an opportunity and are doing their investigation work right now, today, and may possibly jump in 2010,” he said.
That, plus an improving approval percentage rate, has to be good news for the industry.
“I’m not ready to declare victory,” Collins said, laughing, “but we are definitely seeing some positive signs. It gives me confidence that 2010 is going to be better.”
Dec. 28, 2009 – Is the tightfisted time over?
By Neil Pascale