Westlake flourishes through credit drought

Westlake's Ian Anderson: We'll buy a loan for a customer with a 380 credit score as long as he has enough money down.
Over the past two years, Westlake Financial Services has been snapping up the business that many other lenders left on the table.

Westlake, of Los Angeles, was founded in 1988 to make car loans to customers with risky credit. The company bills itself as the "Yes! Yes! Lender" because it finances customers other lenders turn down.

The business flourished during the credit crisis as other lenders exited subprime financing.

Westlake has doubled its dealer network in the past two years to 6,000, of which 30 percent or 1,800 are new-vehicle dealerships. In early 2008, franchised dealers accounted for just 11 percent of its base.

Franchised dealers are eager to sign up with new lenders to replace those that dropped out of the subprime business. Public auto retailers AutoNation Inc. and Sonic Automotive Inc. recently added Westlake to their lists of preferred lenders, the finance company says.

Andrew Schroeder, general manager of Watseka Chrysler-Dodge-Jeep in Watseka, Ill., never had heard of Westlake until he took the job at Watseka a year ago. "I was very surprised," he says. "I didn't think people who were that credit-challenged could get financed."

In 2008 and 2009, Westlake entered 12 states, placing it in 44 states by January 2010. Its Web site indicates the company plans to be in all 50 states this year.

Westlake funded more than 7,670 car loans in February, up from an average of 5,000 a month in 2009.

"We have strong liquidity," says Westlake CFO Paul Kerwin. "While everyone else was tightening credit, we've been able to stay in the subprime business."

In addition to private investors, Westlake has credit lines through Wells Fargo, Bank of America, Comerica Bank and First Tennessee Bank. The company also raised capital by selling auto loans as securities to investors in 2003 and 2005.

Almost anything goes

Westlake offers a variety of finance programs, some with no minimum credit score. The company operates an online portal that allows dealers to structure a sale by typing in the down payment, vehicle specifications and customer credit information. The software lets the dealership know when the deal is approved.

"We will buy a loan for a customer with a 380 FICO score as long as the customer has enough money down," says Westlake President Ian Anderson. "They may want a 2008 Camry, but their credit and down payment may not be strong enough. Instead, the customer may leave with a 2006 Camry, but at least the dealer is selling a car."

Mark Pelafos, COO of Worden Martin Auto Group in Champaign, Ill., says his company has relied more on Westlake in recent years as the dealership stocked older, higher-mileage used vehicles that it would have wholesaled in the past.

Those less expensive vehicles are just the ticket for customers with substandard credit, Pelafos says.

Josh Payne, finance manager for Pelafos' operation, says the typical deal Westlake finances involves a vehicle 6 to 8 years old with 70,000 to 80,000 miles on the odometer. Typically, the down payment is about $1,500 and the monthly payment $250.

Rates vary by market, but Anderson says current retail rates are as low as 12 percent. On most loans, interest rates range from 17 to 23 percent.

This spring, the company will test a finance program for customers with good credit. The rates for more creditworthy customers will be as low as 5.99 percent for terms of 60 and 72 months, Anderson says.

At a glance
Westlake Financial Services
Headquarters: Los Angeles
Specialty: Customers with risky credit
Total dealer network: 6,000
New-vehicle dealerships: 30%
Territory: 44 states
Employees: 700
Volume: 7,000 contracts a month


Under some of Westlake's programs, dealers earn a finance profit by marking up the interest rate as much as 2 percentage points. But under the standard program, Westlake discounts the amount financed based on the risk the customer represents, while the dealer earns income on the vehicle and the aftermarket products sold.

Westlake also offers its "Profit Builder" program, which lets dealers share in the underwriting profit. Dealers set the terms, selling price and down payment. Westlake services the loan, handling collection and potential repossession. It is a "three-payment recourse" program. That means if the customer defaults in the first three months, the dealer must buy back the loan.

The dealership's earnings also stop if the customer defaults. Westlake estimates that over the life of the loan, about one in five customers default.

Westlake advances up to 65 percent of the vehicle's value and will share up to 50 percent of the payment.

"This is a cross between buy here, pay here and traditional financing," Anderson says. "The dealer uses our software to underwrite the loan and participates in the payment stream. We have cut some dealers checks as high as $20,000 to $30,000 a month."

The dealership also receives a portion of the auction proceeds if Westlake repossesses a customer's car and sells it at auction, he says.

The program allows the dealer to make a sale and establish an extra income stream, while the customer gets a car.

Says Anderson: "It's a win-win arrangement."

Westlake's 3 plans
Westlake's products fall into 3 main programs.

1. Standard
• No vehicle age or mileage limits
• No minimum customer income
• No minimum credit score
2. Preferred
• Blemished but established credit
• No minimum credit score
• Bankruptcy is OK
3. Platinum
• Targets near-prime customer
• Interest rates as low as 10%
• Minimum 635 credit score
• One repossession is OK