Some auto lenders have begun to tighten credit criteria. In that environment, a full-spectrum lender may gain the most business from dealerships.
Lenders may be protecting themselves from additional risk after delinquency rates recently edged up, but if their competitors continue to offer financing for subprime and nonprime credit tiers, then conservative, prime-focused lenders may start to lose business.
AutoNation Inc. CEO Mike Jackson alluded to that during the company's second-quarter earnings call last week. He pointed to Wells Fargo, whose auto originations plummeted 45 percent to $4.5 billion in the second quarter, reflecting the company's tightened underwriting criteria.
"Obviously, when a finance institution makes that decision, for whatever reason, they're going to lose a tremendous amount of business, not only the business below the line that they've cut, but we will shift business to other lenders who will buy broadly," Jackson said.
Jackson said dealerships benefit from a fuller relationship. "If your strategy is just to skim the cream, it's going to be a problem. We need a broad relationship with lenders and have outstanding relationships with lenders who buy on a broad basis," Jackson said.
Post-recession, many subprime-only, or "special finance," companies emerged. When asked whether AutoNation would consider developing a captive finance company, similar to CarMax's financing arm, for more subprime customers who would likely visit AutoNation USA, Jackson said he does not consider lending to be a core competency of AutoNation. "I like the system where we are paid a fee to originate the loan, and it's an arm's-length decision without contingency as to the approval of the loan," he said.
The dealership group works with "some excellent subprime lenders with whom we have long-term relationships and approach the business in a very disciplined way," he said.
Lenders, such as Wells Fargo, are likely making strategic decisions when they tighten underwriting standards. But is it worth the risk if it pushes dealers to look elsewhere for funding?