Thursday, June 14, 2012

What Is Special Finance?

The definition of Subprime or Special Finance (SFI) can vary greatly from dealership to dealership. Generally, Special Finance is defined as the ability to obtain credit for customers who are normally unable to finance a vehicle through your conventional or primary lenders. Typically these customers have either a limited credit file or credit issues that make them undesirable to primary lenders. Let's look briefly at the common issues.

Credit Score: Many lenders use credit scores to define Special Finance applicants. Typically, banks regard a score below 620 as sub-prime or Special Finance territory. While this is not a hard and fast rule, it gives us a starting point to work from. Many lenders use other criteria along with the credit score to determine an applicant's credit worthiness. A recent repossession or bankruptcy, or a rash of late payments in recent months may render a high credit score moot, as well as a limited credit bureau containing all brand new accounts with low limits.

Repossessions: Vehicles that for one reason or another were returned to the lender.

Voluntary repossessions are those that the customer returned the vehicle to the lender in order to avoid having to pay any recovery fees.

Involuntary repossessions indicate the lender had to send somebody out to physically find the vehicle.

Bankruptcies: Federal filings that allow a consumer to get judicial relief from his debts. Recent changes in bankruptcy law have made it more difficult to file.

Most debtors fall into Chapter 13, also know as a Wage Earner's Plan (WEP). The debtor gives his money to a trustee, who allows him to keep a small portion to live on. The balance goes to his creditors to pay down his accounts. Typically, the court requires 3-5 years of payments before "discharging" the debtor from the balance of his debts and allowing him to start over.

"Chapter 7" bankruptcies allow the court to grant the debtor immediate relief from his debts. The court effectively wipes out all of the debtors balances and gives a fresh start. New laws require the courts to consider income and ability to repay some of the debt before granting either motion.

Charge Offs: Accounts that the lender has occur at the point in the life of a debt where the lender has given up trying to collect the debt, and has written it off. Generally, these charged off accounts end up as collections. A creditor will sell his charged off accounts to a collection agency for pennies on the dollar, so any monies the collection agency gets from the debtor is found money.

Late Payments: The credit bureaus rate accounts as paid on time, 30, 60 or 90 days late. Obviously, 90 days late is significantly worse than 30 days, and more often than not leads to the dreaded charged off account.

First Time Buyers (FTB): These are typically applicants who have a thin credit file or no credit history at all. Many times these are young, newly employed college graduates who may qualify under a captive lender's program. In many cases, these customers may be recent immigrants to the U.S., who may or may not have had credit in their native homeland. Some may have a Taxpayers ID Number (TIN) or W-7, instead of a Social Security Number. Whether or not these applicants fall into Special Finance is a matter of debate in many dealerships, and we will address this issue a bit later.

Time in Bureau: A limited credit file, having only a few minor accounts opened for a short time. While these credit bureaus may show a relatively high score, the quality of the accounts (local department stores or merchants, secured credit cards, accounts with minimal credit limits) makes it difficult for a lender to asses the character of the applicant. Usually these credit files have a few accounts opened for a short period of time with either a limited payment history or none at all.

Tax Liens: The Internal Revenue Service or a state or local taxing authority places a lien on property owned by the debtor. If the debtor owns no real property, a paper lien is filed which allows the taxing authority to attach any property the debtor may acquire.

Public Records: Garnishments, judgments or other matters that become an item of public record due to a court order. Included in here may be records of a bankruptcy or a state or federal tax lien.

Credit Counseling: Often a precursor to filing bankruptcy, credit counseling is a process where a debtor enters into a contract with a credit counselor or agency to arrange partial payment on the outstanding debts. Typically, these accounts are approaching the "critical mass" of becoming a charge-off. The agency has negotiated a repayment plan with the creditor, and each month the debtor pays a sum of money to the agency, which pays the negotiated amount to each creditor. Most of the agencies require the customer to agree not to expand his debt while enrolled in the program, and lenders typically will not consider an applicant who is actively enrolled in credit counseling.

Settled Accounts: These are accounts in which the creditor considers the account closed, but the debtor has paid less than the full amount owed to the credit. The creditor has agreed to accept whatever repayment they were able to collect on the outstanding balance, which was reduced by eliminating a part of the interest owed on the account in order to collect as much of the principle as possible. These accounts are typically viewed by a lender as just short of a charge off, and tend to indicate the applicant's inability to meet their obligations.

So, what business are you in?

These might sound like strange questions and yet they are very important ones to answer. The business you are in can change with every customer you work with!

If properly managed, "sales" in the automobile industry falls into three different businesses:

If working with customers that have "A" credit (Prime), you are in fact selling new and used vehicles.

If working with customers that have "B-D" credit (Special Finance), you are first in the loan origination business.

If working with customers that have "E-Z" credit (Buy Here Pay Here), you are in the collection business.

So which business are you in? Many dealerships make the mistake of believing they are only in business of "selling new and used vehicles". The problem with that is that many of their customers fall in one of the two non-prime categories of credit. If you are working with customers that have less than perfect credit, you must also see yourself in the "loan origination" and/or "collection" business.







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