PeopleFirst.com, a 3-year-old online auto lender in San Diego, expects to write $800 million worth of loans this year, roughly quadruple its 1999 volume, said CEO Gary Miller. PeopleFirst.com only approves buyers with tiptop credit. But the bad news for dealers is they make no interest-rate profit on a PeopleFirst.com loan.
Miller and David Zeller, president, co-founded the company in 1995. Before joining People First.com. Miller worked on Wall Street for nine years as an expert in asset-backed securities. Many auto lenders use asset-backed securities to raise funds. The lender sells the month-to-month income from a group of loans to investors. Instead of waiting for customers to repay the loans, the lender uses the investors' money to make new loans.
Miller, 44, is a former vice president for Moody's Investors Service, which rates asset-backed securities; and a former managing director for Financial Security Assurance, which insures asset-backed securities. Before that, he worked for five years in the finance office of Ford Motor Credit Co. in Dearborn, Mich. Reporter Jim Henry interviewed Miller last month in New York.
With your background, I assume you fund your loans by selling asset-backed securities.
We closed a couple of weeks ago on a $245 million transaction.
What makes you different from other dot-coms?
We pioneered the blank-check approach. And we only underwrite excellent credit. We have been in the business almost three years, and in that time our experience is from 10 basis points (of losses) to 20 or 30 basis points (That is, losses are only 0.1 percent to 0.3 percent of loans).
Why so low?
That was the original vision for the company back in the early 1990s. We wanted to set it up so there would be virtually no risk of loss. Getting a loan (the traditional way) is a reasonably painful process. So we started the 'blank check' approach, which basically turns a loan into a cash buyer at the dealership (by allowing the customer to have a high line of credit), and that makes the experience much easier.
How do you sign up dealers? Or do you sign up dealers?
Our check is good at any franchised new-car dealership, or virtually any independent (used-car) dealer. It's also good to buy a car from an individual.
How do dealers get paid?
With us, they don't make any money on the finance and insurance; they do get to sell a car. ... We're not indirect at all; we're direct to the consumer.
Are you excluded from doing business in any states?
We are not in New Hampshire or North Dakota. (Note: In the recent $245 million asset-backed deal, 19.6 percent of the 14,298 loans originated in California, 10.1 percent in Texas, 5.5 percent in New York and 5.2 percent in Florida. No other state had more than 5 percent.)
Is it a big deal for you that Congress recently made electronic signatures valid?
We've changed the way people can get financing with the blank check. With e-signatures, we're trying to think what that can do for the customer. Customers already apply online; they can choose automatic debit payments that are authorized online. We do send them a blank check and a contract, with a disclosure document with the interest rate, the APR (annual percentage rate), etc. Could you provide all that online and read it, maybe print it out? Yes, but they would still need something (on paper) to pay the dealer with. I mean, how much easier can you make it? ... I don't think the process improvement (from e-signatures) is that much greater than what we have now.
That's one of the reasons we've been successful. The promise of the Internet is you can be a premium service provider and the low-cost producer at the same time.
Where do you get your financial backing?
We have warehouse lines with Prudential (Securities Inc.) and Barclays (Capital Inc.).
Are you subject to regulation like a bank, or a subsidiary of a bank?
We're a finance company, like other finance companies.
Is it hard to meet state requirements?
We don't have a physical presence in most states, but some states require it - Texas, for instance.
You're private, right?
We're a private company. Our family and friends - basically - raised $1 million in 1995, then again a year and a half later. Then our family and friends ran out of money, and we went into venture capital.
Are you interested in doing an initial public offering?
We'll do what's in the best interest of shareholders.
How have you grown?
We have basically quadrupled twice, from about $50 million in 1998, to $200 million last year. We should approach $800 million this year. Our growth is so fast because we pioneered the blank-check approach. Why wouldn't you want to bring us in the dealership with you? It's an easy process, a good (interest) rate, a good customer experience.
How do you advertise? Strictly on the Internet?
We get in front of people who are looking for information on car loans. We have a lot of strategic partners, like Edmunds.com, Kelley Blue Book, Bank Rate Monitor. ... Five to 10 percent of our business also comes from referrals. We've done more than 10,000 loans, and we offer $100 back to anyone who is not satisfied with the customer experience, and we've had maybe a dozen people take us up on it.
Do you tailor your message somehow, to exclude people who won't qualify?
You really can't. With the privacy of the Internet, the fact that you're 24/7, you tend to get a lot of weaker credits, because it's very easy to apply. We do decline most of those that apply.
Do you worry about relying too heavily on asset-backed securities? In subprime, that's what got a lot of those companies in trouble (when loans performed worse than expected, and investors had to be paid off, regardless).
It's a very, very efficient form of funding. That's the reason people use those markets. Our last deal was several basis points within Ford (making the rate that People First.com pays investors who buy the securities competitive with the rate paid by Ford Motor Credit Co.) So our cost of funds is in effect parity. And at an equivalent cost of funds, we can compete on other things, like efficiency, technology, service.
Do you offer leases?
We could partner with somebody, but we don't want to get into the business of residual risk.
Who are your competitors?
We see ourselves going up against local banks and credit unions, and, of course, dealers. There are a few (online lenders) who have kind of replicated what we pioneered, but we're the only one with origination, underwriting and servicing. E-loan and Giggo.com both do blank checks, but they don't underwrite or service. They only underwrite to the standards of somebody else, sell the loans off and the paper may end up with somebody the customer never heard of. About the only thing we don't do is repossessions. We hire an agency for that - not that we've had many repos.
I notice you don't say captive finance companies.
We do tend to go after vehicles where the captives aren't, where we don't encounter this 0.9 percent APR (offered by the captives) problem.
Do you have a portfolio of nothing but luxury cars? Lots of Porsches?
Rather than Porsche, Mercedes and BMW, we have actually a very typical portfolio of brands. SUVs are very popular, and $20,000 to $22,000 is the average loan, right in there with the national average. The misconception is that 'excellent credit' means somebody is rich.