"Dealers have been screaming for this for years," says Joseph Scimone, president of Chase Automotive Finance. "Dealers are saying we are finally starting to buy (contracts) like the captives."
Captive companies typically finance riskier deals than many banks do, to get customers into new vehicles, Scimone told Automotive News.
Chase's broadened near-prime lending enables the bank to get higher profit margins on retail finance contracts and leases, Scimone says. Near-prime customers pay higher interest rates than those with the best credit. A portfolio that includes enhanced near-prime lending also promotes Chase's financing of dealers' vehicle inventory, he says.
Chase is the auto finance arm of JP Morgan Chase and Co. It is the largest bank purchaser of vehicle finance contracts in the United States. Chase works with 16,000 U.S. dealers.
The bank previously served only the most creditworthy, "prime" customers. But when Chase merged with Bank One Corp. in 2004, it acquired expertise in dealing with near-prime and high-risk subprime borrowers.
Chase defines near-prime customers as borrowers with credit scores between 620 and 680. Scores generally range from 375 to 900).
The bank has added other criteria for assessing credit risk, such as vehicle make. Models with lower residual values, higher repair costs and a greater prospect of repossession carry higher risk, Scimone says.
In addition, Chase is making loans for a larger share of a vehicle's value. It also is encouraging dealers to finance more aftermarket products.
"That's important because dealers today make more and more money off the back-end (finance and insurance) product and less money on the sale of the car," Scimone says.
Chase can charge as much as 5 percentage points more of interest to the near-prime customer compared with customers with top credit, Scimone says.
"The higher rates more than compensate for the additional expense" of targeting a riskier customer, he says.
Efren Lopez, finance director of Headquarter Toyota in Miami, says Chase's greater emphasis on near-prime lending is "a big turnaround."
"We used to give them 20 contracts a month," Lopez says. In May, "we gave them 64 contracts."
Chase also seeks to take floorplanning business away from captives, which handle most financing of dealer inventory. Chase had a $1 billion floorplan portfolio before the Bank One merger and $4.5 billion immediately afterward. That business now is worth $7.5 billion, Scimone says.
Dealers often are reluctant to shift floorplan accounts from captives to banks out of fear the captives will buy fewer retail contracts. But because Chase is buying a broader range of contracts, Scimone says, dealers are more willing to floorplan through the bank.
Chase also can offer dealers banking services such as cash management more efficiently than captives do, Scimone says.
But Meredith Libbey, a spokeswoman for Ford Motor Credit Co., said in an e-mail that neither Chase nor any other bank "can match our commitment to the auto business over the long term."
She added: "The only reason Ford Motor Credit is in business is to help our dealer partners sell vehicles. And the money we make is reinvested in Ford Motor Co. and shows up in our dealers' showrooms in the form of new products
that improve the value of the dealer franchise."
You may e-mail Donna Harris at [email protected]