Subprime automotive lender AmeriCredit and giant Chase Auto Financial Services have announced a joint venture in which Chase refers subprime customers to AmeriCredit.
The arrangement is a good deal for both sides, said Joe Scimone, Chase Auto senior vice president, in a March 4 phone interview.
Chase Auto, based in Garden City, N.Y., will offer a direct channel via its affiliated dealers for applications to AmeriCredit. And Chase also will refer its turndowns to AmeriCredit, Scimone said. That should free Chase to concentrate on applications that are more likely to be approved, he said.
AmeriCredit, of Fort Worth, Texas, gets more applications out of the deal. The agreement calls for AmeriCredit to pay Chase for access to the applications, provided they meet AmeriCredit's goals for profitability, Scimone said.
'Chase has a reputation as an A/B (credit risk) buyer. ... Even with that reputation, 20 percent of our applications are applications we are going to turn down virtually every time,' he said.
'We've built an organization for servicing, collecting and buying A/B paper. ... Our cost structure, our infrastructure, which is highly centralized, are all based on being a buyer of A/B paper. ... We were looking for somebody to buy where we leave off,' Scimone said.
Some competing banks, such as the even bigger BankAmerica Corp., have opted to stay out of subprime, even at arm's length.
'As a banker, it (subprime) is contrary to everything you've learned for most of your career -trying to understand and buy good credit - and subprime drives you to buy bad credit,' said Pat Doran, president of BankAmerica Auto Group, in a separate phone interview.
A year ago, Doran said he was considering starting a third-party referral for subprime, but he said he ultimately decided against it. 'We've tried it. ... The economics tell us we have trouble making sufficient money to make it an attractive foray for us,' Doran said.
Chase's relationship with AmeriCredit will begin with a pilot program in Texas, involving only a few thousand applications a month, Scimone said. At first, it will be direct referrals only. Chase turndowns will follow after a month or two, he said. The joint venture probably will expand first on the West Coast, Scimone said.
Potentially, if the program goes nationwide, AmeriCredit could get a big volume from turndowns. Scimone said Chase processes 125,000 to 150,000 applications a month, and regularly turns down about 20 percent.
AmeriCredit is a rare bright spot in the subprime sector, with record profits of $17.4 million in 1998 (see story on Page 22i).
President Michael Barrington said, in part, that is because AmeriCredit has always avoided the very bottom of the barrel.
'Subprime, by definition, is a broad spectrum of risk,' Barrington said.
'AmeriCredit's strategy has always been to play where we get paid.'