Training » 5 Critical Success Factors » Proper Lender Relationships

5 Critical Success Factors:

2. Proper Lender Relationships

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The second fundamental is having the proper lender relationships. As with any of these other fundamentals, failure to have the proper lender relationships can easily cause your subprime effort to fail. As a meaningful supplement, you might want to review last month’s article when we discussed the importance knowing your lender’s niches. Among those niches, we talked about how your lenders handle twelve particular items including:
  • Calculation of Income
  • Trade stipulations
  • Overtime, bonuses or commission
  • Housing debt ratios & delinquencies
  • Additional income
  • Length of employment
  • Debt calculations
  • Stip requirements / flexibility
  • Payment to income ratio
  • Vehicle limitations
  • Down payment requirements
  • Advance
When speaking with dealerships about their lender relationships, I commonly hear comments that reveal potential problems. A first is, “I am signed with everyone. There isn’t a lender out there we don’t have”. A second is, “I only work with two to three of the top tier national lenders and that’s enough.”

You must have the proper mix of sub-prime lenders that purchase contracts covering the full spectrum of “B through D” paper. Typically dealerships should be working with 4 to 8 lenders, including some “deep” lenders with higher discount fees.

The problem with being signed with “every” lender is that your dealership’s volume becomes so diluted that it never registers as important on the screen of any particular lender. Remember we are talking about lender “relationships”. When you help them get what they want (funded contracts) they will help you get want you want (approvals and cash). The stronger your connection and dealings with your lender pool, the more successful your approval and funding process will be, so keep your active relationships to an appropriate number. That number will be determined by your contract volume, the credit mix of your prospective customers and your lender’s look-to-book ratios. A good rule of thumb is to have active relationships with 4 to 8 lenders with 60% of your business going to only 2-3. When considering whether to add a lender, ask yourself whether that relationship will produce at least two more profitable or additional deals per month.

I have little doubt that your market includes buyers with “B through D” paper. I often hear dealerships comment, “I don’t want to mess with the deeper discount lenders because their fees are too high”. The economic fact is higher risk loans equate to higher pricing. I’d ask this question. If walking down the street, you found and picked up a stack of hundred dollar bills, would you later pass up and leave on the curb a similar size stack of bills because they were fifties? Absolutely not! In the same way, evaluate your relationships with higher risk/fee lenders. Your profit may not be as high on these sales, but does maintaining that lender relationship add meaningful profit to your bottom line? Might that relationship also benefit you by moving aged units at retail, avoiding wholesale losses? You may rightly decide through marketing and inventory not to actively pursue that customer, but when that “D” paper does come in (and it will), are you prepared to handle that customer?

No one lender will buy it “all”, but securing every possible approval is necessary to maximize profit for the department.

You should measure and track your approval ratio with a minimum target ratio of 25%. Subprime metrics (100/50/25/10 Rule) suggest that for every 100 workable leads, you should be presenting ~ 50% of them to your lenders. Of the 50% presented to lenders, you should see an approval rate of ~ 50%. Of the net 25% approved, you should deliver between 40-60% resulting in a net 10-15% delivery ratio. If you are missing your approval metric, it will translate to fewer deliveries and less profit.

Because no one lender buys it all, the question becomes which lenders do I add on and where do I find them? This investigation will pay huge dividends. In all likelihood, you should be dealing with a combination of both national and regional lenders. By evaluating the credits scores and niches each lender covers, you are seeking to get “blanket” coverage of your market. If your market includes a significant military presence, you should have military lenders. If you have a significant Hispanic or immigrant population and staff to work with them, be sure to have a lender that accepts a Federal ID number in place of a Social Security number. Seek to cover “B through D” paper and the “niches” we discussed earlier.

Before adding a new lender to your mix, find out about how they fund. Discover whether they are set up for ACH, bank draft or checks. If checks, are they overnighted or shipped by mail? How many days on average does it take to fund their deals? This will best be learned by asking for the names of 3 dealerships (recently funding a similar number of deals/month that you expect to send) you can call as references. Deeper buying will generally translate to harder funding. Talk with other dealers to reveal funding tips prior to selecting that lender.

So how do you find these lenders? I’d start by talking with other dealers who are successfully running subprime sales departments. You may have to call outside of your immediate market area but I’ve found most dealers are happy to speak about their successes. Ask at your Twenty Group. You may ask your lender Reps and Buyers for names of their most successful dealers to get access to those dealers who know the most. Also talk with your lender Reps and Buyers. The better ones typically know which other lenders are effectively helping their dealer base. Occasionally, you will even learn from customers you interview. Make a note particularly of those Regional lenders you discover and call them. Regional lenders tend to buy a bit deeper credit.

Your staff must properly manage your lender relationships including Look-to-Book (submissions cost lenders money), Time-to-Fund, CITs, Bank Fees and more.

It is easy to read the statement above and think only of guidelines, ratios, days to funding, fees by tier, etc. Each of these items is very important when making a decision about which lenders to bring on board, but remember ultimately there is a “relationship” that carries this business along. Take time not only to get to know your lender’s programs, but also the Reps and the Buyers themselves. Let them know they are as important to you as you are to them. Treat them like you want to be treated. Every now and then take them out to lunch! Having them consider you as a friend will immeasurably improve your relationship. While you may see a Rep more frequently, don’t forget your relationship with the Buyer. That relationship may be where the rubber meets the road. Ask, evaluate and be aware of the influence of the Reps have with the Buyers. Taking a personal interest both is just smart business.

Get to know the lender’s guidelines. It’s important that you understand not only what is printed on paper but also the Rep’s and Buyer’s interpretation of that program. Learn the lender’s way, don’t try to teach them yours. Sometimes it’s not what is written down that is most important. Remember the old adage that “questions are the answers”. Ask questions. Some valuable to ask might be: Are there flags you are aware of that get a deal turned down…ones that get it approved? How is a deal broken down once it arrives for funding? How and when do you verify income, employment, residency, etc.? What’s most important to you when adding a new dealer on? How do you evaluate the success of our relationship? What is your optimum look-to-book ratio or the threshold for cutting a dealership off? What are portfolio delinquency and repossession thresholds? What does it take to be “Tier 1” dealer? Depending upon the relationship, you might even inquire about their compensation plan to understand what motivates them. What does it is take for you to get to your next bonus level?

Pure economics will not always drive the right funding decision. Sending a contract to the lender that allows you to earn the highest gross will not always be best. There will be times when it is appropriate to send a contract to a smaller gross lender. Possibly it will be to get the deal funded more quickly, or it may be to establish relational equity for other deals that lender will uniquely be able to fund for you. I’d suggest that if you plan to call on a lender for favors, be sure to pay for them in advance.

REMEMBER: Establishing and managing the proper lender relationships will pay you dividends for years to come!

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