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Volvo's young captive explores new territory

Dan Romagnoli: "Last year turned out to be a big year."

Volvo Car Financial Services U.S. is a young captive finance company, in business only since late 2012. But its leadership is seasoned.

Between them, new CFO Dan Romagnoli and new CEO Tony Nicolosi have spent half a century at Volvo in some capacity, and their relationships with the automaker are close. That's largely why Volvo Car Financial provides not only F&I products but also programs to help Volvo dealers sell more cars.

The team is leading the lender into unfamiliar territory for a luxury brand, including subprime lending and outreach to students.

Romagnoli, 50, discussed Volvo Car Financial's plans for 2015 with Staff Reporter Jamie LaReau.

Q: How was 2014 for Volvo Car Financial Services?

A: Last year turned out to be a big year. Our volume was down from the previous year, but we just formed this captive finance company back in December 2012. So 2014 was our second full year of operations. It was a bit less volume, but that's connected to the car company sales and there were some discontinued models. So year over year we did well on the cars that were continued.

What is Volvo Car Financial doing now to make up for the shortfalls?

This year we've got a few new models coming out, which are going to help the car volumes. So we expect a substantial increase in our new-car financing volumes.

We set up the company about two years ago primarily for prime business as well as near-prime. We're looking at an opportunity now where we're able to expand our credit underwriting, so we're able to offer subprime to our finance customers. That'll be helpful for us in the sale of used vehicles but also some new vehicles that are in that credit quality.

What credit scores is the company looking at?

We do very well from 640 and above today. We can do more in the 640-to-680 range [the near-prime area], and we can also open it up to below 640 and even into the 550 area [subprime, but not deep subprime]. We're in the investigation phase right now. We will start, most likely, in the second to third quarter.

How much demand is there for subprime?

There are a couple of things happening right now with Volvo. They have a Volvo 360 program, which is their full-circle lease program, and that, in turn, is driving more off-lease vehicles back into the dealerships after, say, two years, three years and four years. As a result, there's an increase in used-car financing. We'll be able to satisfy that need with the financing we have today as well as the new financing we'll put into place.

What else is the company doing to help dealers?

We're looking into a program with a company called Open Dealer Exchange, and that's for lease validation.

We're able to have this system tap into DMS systems, and before a lease contract is actually printed, it's able to take the lease financials in the contract, validate it through some rules we've developed through working with Open Dealer Exchange and this could be validating residual value, the rate factor, taxes, cents per mile, all the financial parameters on the lease contract. This way, we eliminate all the lease chargebacks to dealers if the contract was valued incorrectly.

And 2015 is the year to put it in action?

Exactly. And this Open Dealer Exchange lease validation is something that can help us from a leasing perspective.

What does Volvo Car Financial expect in terms of lease business this year?

We ended last year at about 38 percent lease penetration, and I think this year will be pretty close to that number. But the lease volume will start to pick up when the new vehicles come in play. The big one this year is the XC90.

Will the company run any special incentive programs to promote that?

Yes. One is a bridge program. So, for example, if a dealership sees a customer drive in with a competitive lease and that lease is expiring in February or March, which is prior to the launch of the XC90, we have a program that helps the dealer allow the customer to return their existing lease, get into a Volvo vehicle for a period of say two, three, four or five months until their ordered XC90 is available. This is to help them bridge the gap in time between the end of their first lease and get them into the new XC90.

Are extended service contracts offered, and where is the company going in that area?

Volvo Car Financial Services offers an excess-wear-and-use program. The other products are Volvo car programs. But I'm looking toward the end of this year for the Volvo Car Financial Services market manager to help to sell those products. Those are really Volvo Cars. We're facilitating the sale of those products. But it's really the car company's responsibility to manage those products.

Would Volvo Car Financial want that under its umbrella at some point?

Yes, it's a bit of a dual responsibility because some of those products are sold in the F&I department, and it's a logical fit for Volvo Car Financial Services marketing managers to help facilitate those sales. But some of those products could be sold in the service lanes, which is outside Volvo Car Financial Services. It's more of a joint effort that needs to take place for the two companies to sell these cars effectively.

What challenges are ahead this year?

Obviously, the subprime part because it's a new venture for us.

There are a few other programs we're looking to put together. As an example, we have a program today for expatriates. So if there's an expatriate coming into the country working here [for] a two- or three-year time period and wants a lease, it could be difficult. We have a program specifically designed for those types of people.

We're looking to do something somewhat along those lines with the overseas students. So if we have overseas students coming into the United States entering into the university here and are expected to stay two, three or maybe four years, we're looking to couple that time frame with a single-pay lease product that we have. It's a bit of a niche market, but there is opportunity to have these students enter into the Volvo family.

How involved is Volvo Car Financial in helping market Volvo cars?

With existing customers, we're raising awareness with product introductions through invoice messaging. Invoice messaging is used to reach retail finance customers using an invoice. With a paper or electronic invoice, we're able to send messages on the face of the invoice to the customers on the new products that are coming out. So for our existing customers, we do have the ability to raise the awareness of the cars that are coming out from a big launch perspective, say, an XC90 or some of the variations to existing cars.

So it's very targeted marketing?

Yes, and it can be very selective for certain parts of the country. We can run service campaigns to bring the customer back into the dealership for service, for some parts discounts or oil change and maintenance.

Volvo Car Financial is an active, involved captive. Was that a conscious choice when forming the company?

Yes. When we formed the captive finance company, we coordinated with Volvo Cars in the same building. We see each other in the hallway. It's a great way to have constant dialogue, and we're all working for the same thing. We're all focused on the Volvo car sales, Volvo dealers' performance, and we're looking at ways to help them improve performance. We're very much tied at the hips.

You can reach Jamie LaReau at jlareau@autonews.com -- Follow Jamie on Twitter: @jlareauan

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