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Tight spot

Demand for 1-stop shopping forces dealers to gamble on financing

Finance & Insurance
Spot delivery
  • Customer takes delivery sooner
  • Lenders usually approve deal
  • Reduces “be-backs” Cons
  • Customers can provide misleading information
  • Lenders may reject deal
  • “Unwinds” annoy customers

  • Spot delivery — a growing practice for those who want one-stop shopping — can be risky for dealerships. The present economic downturn increases those risks, especially in markets where spot delivery is common, such as California.

    In general, spot delivery occurs when a customer buys a car “on the spot” out of dealer inventory and drives away, all in the same visit. It may be a cash or credit sale.

    The F&I department defines spot delivery in a narrower sense: The customer agrees to buy a car on credit and the dealership delivers the car before a lender approves the loan.

    What other business would deliver such a big-ticket item before the financing was approved? Certainly not the real estate industry.

    Quicker credit decisions are a growing remedy. A few highly automated lenders say they can turn thumbs up or down on an auto loan in 20 seconds.

    But most dealerships still send applications and get approvals by fax, with a response in 30 minutes, an hour or, at worst, a couple of days. So dealerships making spot deliveries continue to go out on a limb in many cases.

    Yet spot delivery of vehicles to prime-risk customers — those, in the dealer’s judgment, who are virtually certain to pass muster with the lender — is common, especially in competitive markets and on weekends, when many lenders are closed.

    Safe bet

    The dealership making a spot delivery is betting on two things:

    1. The customer is as creditworthy as he or she appears, based on a quick check of credit history.

    2. A lender will approve the loan on the proposed terms.

    Although the majority of the applications are approved, the economic downturn is making both halves of that bet more risky.

    Some customers with a good credit history may start having problems, and may conceal those problems. And many lenders have tightened standards, abandoned some markets or even bailed out of auto lending, said Joe Scimone, senior vice president of sales and marketing for Chase Manhattan Auto Finance Corp. in Garden City, N.Y., the nation’s biggest bank-based auto lender.

    Scimone said dealers making spot deliveries should be vigilant about lenders changing their standards: “My warning to dealers is, if the economy changes, they should pay attention to the consistency of their credit. That’s something they really have to watch.”

    Dealers in competitive markets view spot delivery as a necessary evil. They don’t want to lose a sale because the customer refused to wait for a loan to be approved.

    “In the L.A. market, our dealers know that if we let the customer walk out without a car, my competitor’s going to take that chance and deliver a car to them. That’s an underlying theme in spot delivery,” said Peter Welch, a staff lawyer for the California Auto-

    mobile Dealers Association.

    In a spot delivery, the customer completes a credit application and negotiates a finance contract with the F&I manager for a specified price, down payment, interest rate and monthly payments.

    In some states customers fill out an “unwind” agreement, stating that if financing is not approved within a certain period — 10 days is standard in California — they will return the car or pay for it another way. Other states prohibit any separate agreement that is not part of the finance contract.

    Instead of making the customer wait for a lender’s approval, the F&I manager checks the customer’s credit and makes an educated guess the deal will be approved.

    Most of the time the lender buys the contract as expected. But a dealership that guesses wrong about the buyer’s qualifications and/or the lender’s willingness to approve the deal has three unpleasant alternatives:

    1. Cancel the deal and take back the car. Legally and financially, that might not be attractive, even if the customer surrenders the car. In California, once a car has been sold, it must have a used-car title before it is resold, Welch said.

    2. Hold the loan and collect the money.

    3. Ask the customer to sign a new agreement. This is the most common outcome if the deal falls through, said several F&I executives. Naturally, consumers view this as reneging on the original deal, and that reaction has sparked consumer complaints and lawsuits.

    “The biggest risk isn’t that you have to go back and take the car back,” says Scimone at Chase Auto Finance. “The risk is that the customer has to come back and sign another deal.”

    It usually works

    Spot-deliveries seldom “unwind” — fewer than 1 percent of the total, said Greg Penske, president of Penske Automotive Group of El Monte, Calif. But when it happens, it’s a painful experience for customers and dealers.

    Dave Robertson, chairman of the Association of Finance & Insurance Professionals, an association of dealership F&I managers in Bedford, Texas, said: “It happens very rarely, but there’s no joy on anybody’s part when it does. … No dealer likes to take a car back with 700 miles on it, and no customer likes to bring the car back and drive home in their trade-in.

    “The person who really goes crazy is the customer, because they’ve had that new car sitting in their driveway.”

    Phil Hartz, a group vice president at UnitedAuto Group, the No. 3 U.S. dealership group, agreed that spot-delivery deals seldom come unglued. “It happens very rarely,” he said.

    Chase Auto does not keep statistics on the number of prime-risk new-car buyers who drive off with their vehicles before a loan deal is written in stone. But Scimone said eight sales managers reporting to him from around the country estimated such deliveries range from a low of 15 percent to 20 percent of deliveries in the Northeast to more than 90 percent in big West Coast markets. He estimated the Southwest at 25 percent to 35 percent and the Southeast at 80 percent to 85 percent.

    Spot delivery is so common in California because of the high degree of competition in markets such as Los Angeles, Welch said. Another factor is that most California dealers use a standardized finance contract that is accepted by most big lenders, thus reducing the risk.

    In New York, the number of spot deliveries is low because proof of insurance is required before a car is delivered.

    General Motors Acceptance Corp. does not keep statistics on spot delivery, said spokeswoman Anne Marie Sylvester. “Spot delivery is at the dealer’s discretion; it’s not something we authorize or track. It’s usually on Saturday, when we’re not open,” she said.

    Spot delivery is for prime-risk new-car customers, Scimone said. “It’s not for subprime,” he said.

    If one-stop shopping is rare in New York, it is a way of life in southern California, said Penske, of Penske Automotive Group (Toyota-Lexus-Mercedes-Jaguar-Honda). He estimated that more than 90 percent of the group’s sales are spot deliveries. The vast majority of those same-visit deliveries — 85 percent to 90 percent — get Internet credit approval within a few minutes, before the customer takes delivery, Penske said. The group sells more than 38,000 cars and light trucks each year.

    Internet credit applications and automated decision making are reducing the need to make spot deliveries without loan approval, but those expensive innovations have been slow to catch on. Auto lenders in a Consumer Bankers Association survey reported they used automated decision making for only about 18 percent of their auto loan decisions in 2000, and 21 percent of their lease decisions.

    Scimone said that Chase gets 15 percent to 18 percent of its credit applications on the Internet through DealerTrack, a joint venture with other lenders. He said 60 percent to 63 percent of those are approved or disapproved by automated decision making. “We’re taking spots and converting them to nonspots,” he said.

    The bank turns around 90 percent of its applications within an hour and the other 10 percent within three hours, he said.

    Scimone said Chase also authorizes dealers to accept some loans on Chase’s behalf without waiting for a decision, if the dealership determines the customer meets Chase’s requirements.

    So while there are potential problems, all in all, the system works pretty well for dealers, said Welch, the California lawyer.

    “Dealers are pretty sophisticated,” he said. “If you’ve got pretty good volume, you develop a sixth sense.”

    You can reach Jim Henry at autonews@crain.com

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