Continued failures are good news for the survivors in subprime auto lending, and for new entries such as Nuvell and Fairlane.
'Life is good right now, for the survivors,' said Tommy Moore Jr., CEO of First Investors Financial Services of Houston. His company marks its 10th year this month. Many competitors did not make it that long.
'I'm very proud for being in business for 10 years, but I'm probably more proud of surviving the last three years, when the industry had a meltdown,' Moore said.
The vicious cycle of a couple of years ago went like this: Subprime lenders lowered standards to sign up more loans. Lower standards led to higher-risk loans and higher losses. That increased the pressure to sign up more loans. And with so much competition, the only way to do that was to lower standards further.
'It was crazy, it was irrational,' Moore said in a phone interview Feb. 25.
'We sat back the last three years. I didn't grow like I could have. I wasn't willing to do what it took to grow. We knew there would be a day of reckoning,' he said.
Today, with fewer competitors, even subprime lenders can be more choosy about approving loans. And there is less pressure to cut margins. The results can be very profitable.
AmeriCredit Corp. of Fort Worth, Texas, is a rare winner in the segment. Its net income shot up 45.9 percent to a record $17.4 million in the fiscal quarter ended Dec. 31, even as the company added branch offices and made a bigger provision for loan losses. At the same time, economies of scale helped lower per-unit servicing costs, the company said.
Bob Raley, chairman of TFC Enterprises Inc., said in a March 3 conference call with investors that the subprime shakeout is nearing the end.
'Except for maybe two or three more failures, in large part, we're down to the players that'll be around,' he said. TFC, of Norfolk, Va., specializes in loans to the military.
The beat goes on
The shakeout in subprime auto finance is more than two years old. Recent problem cases include AutoBond Acceptance Corp., Monaco Finance Inc. and Aegis Consumer Funding Group Inc.
AutoBond, based in Austin, Texas, stopped originating new loans Feb. 9, growing out of a dispute with its primary lender, Dynex Capital Inc., which handles mortgage financing and other consumer loans. According to AutoBond, Dynex has not provided new funding since Jan. 29.
AutoBond CFO Adrian Katz said his company filed suit against Dynex, and in the meantime, is seeking new financing. 'We have over $10 million in cash, so there's no immediate problem, but our ability to be profitable is obviously affected.'
Denver-based Monaco made a similar report on Feb. 17, saying its sole source of working capital, Pacific USA Holdings Corp., was stopping funding.
Aegis, of Marietta, Ga., reported on Feb. 19 that it was sold to a new majority shareholder, Prairie Boy's Investments Inc. Aegis said its previous majority shareholder and largest creditor, III Finance Ltd., would cut off its existing funding effective March 12.
Since early 1997, at least seven publicly traded, subprime auto lenders have gone bankrupt, out of 26 such companies. The biggest was Chicago-based Mercury Finance Co., last May. A spokesman, Jim Fitzpatrick, said last month that with court approval, the company expects to emerge from bankruptcy by the end of this month.
Other companies, including Money Store based in Union, N.J.; Imperial Credit Industries Inc. based in Torrance, Calif.; and Jayhawk Acceptance Corp., based in Dallas, stayed in business in other fields but bailed out of subprime auto finance.
'There must be 15 or 20 companies that have gone out of business, or merged, or gone bankrupt,' said Bill Wunderlich, president of AutoInfo Inc., a Montvale, N.J., consumer finance company.
First Investors, AmeriCredit and TFC seem to have weathered the storm and stayed focused on subprime. So has Southfield, Mich.-based Credit Acceptance Corp., which turned a year-ago loss into a profit in 1998.
A few other, more diversified companies also continue to show an appetite for subprime auto lending, such as consumer lender Household International based in Prospect Heights, Ill.; subprime mortgage lender ContiFinancial Corp., based in New York; and Conseco Inc., an insurance company based in Carmel, Ind.
'We believe better days are ahead for the industry,' said Jim Rosensteele, Conseco CFO. His company last year bought NAL Financial Group Inc. and General Acceptance Corp.
'We are looking forward to profitability,' he said. After a bankruptcy reorganization, NAL services - but no longer originates - loans. General Acceptance, of Bloomington, Ind., was renamed Consumer Acceptance Corp. It originates loans in the Midwest and Southeast, Rosensteele said.
Another subprime company, WFS Financial Inc. of Irvine, Calif., also is still in subprime auto lending, but in 1998, 68 percent of its new loans were in the prime-risk category, vs. 54 percent in 1997.
Two heavyweights round out the field: Nuvell Credit Corp. in Little Rock, Ark., the subprime subsidiary of General Motors Acceptance Corp.; and Fairlane Credit LLC of Colorado Springs, Colo., which belongs to Ford Motor Credit Co.
The big captives started operations last year, as the rest of the segment was bottoming out. After a cautious rollout, both captives expect to offer loans in nearly all 50 states by year end. That should provide some staying power in the subprime segment, after so much chopping and changing for the smaller companies.
'Obviously, there's a huge difference, being a captive of Ford Motor Credit, or for that matter of GM, and those other companies,' said Jerry Heimlicher, Fairlane president. 'Those other losses, those failures, occurred in probably the best economic time in our history. What are they going to do when those conditions change, and those investors (in subprime companies) turn to something else, with a higher return?'
How did the subprime industry get in so much trouble, in such a good economy?
'The major factor was the losses,' said Wunderlich of AutoInfo. His company lost $10.3 million in the first nine months of 1998, vs. a loss of $826,000 in the same period a year earlier.
That sounds obvious, but Wunderlich explained how the losses came about: 'There was so much money available (for lending). In effect, the demand was created to meet the supply - maybe a little older vehicle, a poorer customer, a poorer credit history. There was no real data out there as to the historical performance of this kind of customer,' he said.
'This is one of those businesses where you start to see the tip of the iceberg, say six to 15 months into the life of a loan - call it month No. 9. In the meantime, you've made another nine months' worth of loans. We started to see problems in the second half of 1997, but we had already bought another $50 million to $70 million in additional paper,' he said. 'This business has a long tail.'