Special Report: Credit Crisis and the Industry – From Dealer News

“I think it’s the sheep effect,” says Carlo Hansen, co-owner of Riverside Kawasaki in Somerville, Mass. “Everybody is scared at the same time. All the news is bad.”

Hansen is referring to the nationwide credit crunch. He says even his local credit unions are spooked. One of them is not accepting any applicant with a score below 650 whereas before it would go down to 580.

“We changed our whole ordering structure,” Hansen says. “We order mostly smaller bikes now. I’m so scared.”

And Hansen doesn’t scare easily. He’s a 40-year industry veteran who also sells Yamaha, Ducati, Triumph and a couple of minor brands. Like many dealers, he’s feeling the frustration of having to turn customers away because of tighter standards and fewer lenders.

Down payments, co-signers, invoice approvals — all have increased in number. Lenders are asking for more things to be submitted in the funding packets. “They’re getting very, very picky, and it’s going to be a major problem next year,” Hansen says.

Even scarier is that many experts are describing the credit crunch as mostly an affair among banks and businesses. Some of these same experts predict consumer credit cards will be the next big crisis. Things could get worse.

But things are already bad in the F&I office. To find out how bad, Dealernews contacted dealers as well as banks, OEMs and consultants. Here’s what we discovered:

* Rates and standards, of course, have risen.
* Lenders are leaving the market, and others are adding restrictions.
* As this happens, it’s become especially difficult to finance used vehicles, leading to used-vehicle stockpiles.
* The whole market seems to be shifting toward installment loans (as opposed to revolving credit) and cash deals.
* Some automotive lenders may actually be entering the market.

Read on for a closer look at these issues.

Captive Financing: The Times They Are A-Changin’

But before we delve into it, let’s review how the manufacturers finance vehicles. HSBC and GE Money underwrite between them most of the major captive finance programs. Exceptions include BMW, Harley-Davidson and Honda, all of which have their own finance arms. But even Honda outsources its revolving program.

The big news right before this story’s posting was that Suzuki and HSBC were ending their relationship at the end of the year. Suzuki had not announced the new underwriter, and it declined to comment for this article. Here’s how HSBC and GE Money carve up the market:

HSBC:

* Kawasaki (installment and revolving)
* Polaris (revolving)
* Suzuki (installment and revolving — until next year)
* Yamaha (revolving)

GE Money:

* Arctic Cat (installment and revolving)
* BRP (installment and revolving)
* Ducati (installment and revolving)
* Honda (revolving)
* KTM (installment and revolving)
* Yamaha (installment)
* Piaggio Group (installment and revolving)
* Polaris (installment)
* Triumph (installment and revolving)

If it seems as though the industry has its eggs in a few baskets, it’s because it does. “It’s a little different in powersports than in auto,” says Bill Shenk, a consultant and 20 group organizer who works with about 80 dealers. “In auto, over the years there has been just a huge amount of sources of money. There hasn’t been a lot sources in retail financing in powersports. The manufacturer has to make it happen. In that situation, if those guys stop loaning money, it just puts the industry on its knees. And I don’t think that’s what these guys are looking to see happen.”

The auto industry, of course, is doing worse than we are. Some manufacturers report sales declines of around 30 percent, and the domestic makers have been reduced to begging.

Powersports firms, on the other hand, are relatively profitable. “So for them to go out and guarantee money to get money to sell their products is not something that is out of the realm,” Shenk says.

Polaris, for example, once shared with HSBC the risks associated with its revolving program. The manufacturer also had to maintain a deposit of $50 million. But a new five-year agreement in August 2005 placed all the risk on HSBC and ended the deposit requirement. Instead the bank began paying Polaris a fee based on business volume, and Polaris began paying HSBC for promotional interest rates.

Then this past spring Polaris filed a lawsuit in district court saying that HSBC breached the contract by threatening to tighten lending standards unless Polaris either gave up its incentives or increased its promotional payments.

Polaris reluctantly agreed to forgo its incentives, as well as make other changes. According to its complaint, if it hadn’t, its annual retail sales volume from card purchases would have dropped below $350 million. The complaint states that in comparison, card sales in 2007 reached $699 million. “As a result of HSBC’s wrongful conduct,” it states, “Polaris has suffered and will continue to suffer substantial damages through the remaining term of the agreement.”

This past summer the court ruled against Polaris and in favor of HSBC.

Other manufacturers probably have rocky relationships with their underwriters as well. “The OEMs obviously want to get their product purchased and want the banks to buy their product, so it’s just kind of a battle back and forth,” says Heidi Byers, who is finance director for RideNow Powersports, a network of 29 dealerships with corporate headquarters in Tempe, Ariz. “It’s always been that way. Nobody wants to lose money, but everybody wants to think that they can make a lot of money if they open up the purse strings a little bit.”

The OEMs have multiyear contracts with their banks, but as the Polaris case illustrates, these contracts likely contain loopholes and conditions — to the effect that even if a bank can’t pull out completely, it can set its standards and rates so high as to render its programs useless.

So seemly it’s more secure to have your own bank, as Harley-Davidson does. Not that it hasn’t had its own problems. The media has had a field day reporting on how nearly a third of the people holding the company’s retail loans are subprime borrowers. Businessweek went as far to say that Harley operated “in a pattern eerily similar to the housing bust.”

Hard to believe that as recently as summer 2007 Harley was offering a 2.99 percent introductory rate with zero down. A Harley dealer tells us the company recently raised its best rate for new bikes to 6.50 from 5.99. Harley Financial’s default rates are up, and it can no longer sell off risky debt as it once did.

Businessweek reported: “Harley’s finance arm has taken some steps to tighten lending to subprime customers. And its beefed-up loan collection staff is making more calls on weekends and evenings to chase down deadbeats.”

Pre-Owned Nightmare

The increasing difficulty in financing used vehicles goes back to summer 2007 when the Polaris StarCard stopped taking other brands. “That hurt because Polaris bought better than any of the other lenders,” says Jim Dirks, finance director for Killeen Powersports in Texas.

Then, about a year ago, Suzuki and Kawasaki began limiting their installment loans to new units of their own brands — no used vehicles at all. This past August, both OEMs limited card purchases to their own brands, but at least this time they included new and used. A couple of dealers in California say they’re still using the cards to finance secondhand bikes. But a finance manager in the Midwest says it’s been many months since she’s been able to finance a used vehicle with the cards. “It may have something to do with the state guidelines,” says the manager, Kerry Maddox of City Cycle Sales in Junction City, Kan. “Some states, like Texas or Nevada or California, have year-around riding, so they may have different guidelines. I don’t know.”

City Cycle Sales is also a Harley-Davidson store, and Maddox often uses Harley’s bank, Eaglemark Savings, to finance what it calls “outside products.” The customer has to pay 10 percent down, and the unit has to be of a type Harley approves. “Used sportbikes we have a heck of a time getting financed,” Maddox notes. “We don’t have a lot of options unless they have perfect credit and they can just buy on the revolving terms. But those are few and far between these days.”

Most other revolving and installment programs also continue to finance used bikes, but not those of other brands. Honda Financial, for example, financed other brands for a few months this year and then yanked the program.

“Our used inventory is stacking up,” says Nick Arce, finance manager for Northland Motorsports in Flagstaff, Ariz. His store is still taking trade-ins, but others aren’t. A potential customer, he says, even rode three hours to get to Northland. “His local dealerships won’t take any more trade-ins because they’re having such a hard time getting funding for them,” he says.

In late August, Yamaha’s installment program also stopped financing new and used vehicles of other brands. “It’s hard for us to finance a Suzuki or a Honda anymore,” says Roy Dinki, finance manager for California’s Montclair Motor Corp., a multiline dealership that doesn’t carry those two brands. “We have a credit union that we can use.” (Dealers’ interest in credit unions is up in general. Click here for a story on the pluses and minuses of using them, as well as on how to approach them.)

Not all dealerships are suffering. Take WOW Motorcycles, for instance. The Atlanta, Georgia-based independent has more than 600 used vehicles on display at any given moment. “We’re unique in that we’re already very good at alternative credit sources and bad credit,” says John Martin, the store’s sales manager. “With used bikes, we’ve had to be creative for a long time. We couldn’t rely just on GE, for example.”

House of Motorcycles in San Diego also reports a healthy pre-owned selection. The store says it benefits greatly from local auctions.

Financing restrictions have also affected new-bike sales. Because the OEMs are financing only their own brands, salespeople at multilines are forced to switch more customers to other brands. No longer, for example, can a diehard Suzuki shopper get a Yamaha loan if he or she doesn’t qualify for a Suzuki loan. Before many customers had been willing to pay a higher interest rate with the competitor’s finance program.

Revolving vs. Installment — Days of Sensible Loans Ahead?

Most dealers know the dangers of revolving credit. People get backward in the loan and never return to upgrade. Many mom-and-pop shops, however, have grown to rely on cards due to their simplicity and promotional value. As we first reported in our July 2007 issue, many of these stores turn away customers who don’t meet the high credit standards that come with such deals.

“All the promotions that GE has, unless you have a 700 score, you can pretty much kiss it off,” says Carlo Hansen of Riverside Kawasaki. “Like the Ducati plan: You needed a score that was crazy. It would not accept most people.”

But dealers report that OEM advertising still trains most customers to walk in asking for low monthly payments, not sensible fixed rates.

Martin of WOW Motorcycles blames our industry’s credit problems not on advertising, but on the overuse of promotions. He recently served on GE Money’s dealer advisory board for two years. “I think GE was pretty clear about the fact up front that promos were never designed to be a total dealership solution,” he says. “A lot of dealerships obviously treated them that way. You can’t run promo after promo and not expect the banks to get bit at some point.”

He continues: “We rarely do a promo, only when a customer forces us to. We’ve always built into our customers: Think down payment, think newer bike, think less-expensive bike. We don’t even try to make money on loans because we make money on our product.”

Martin says that because of its policies, WOW Motorcycles does a lot of repeat business on 24-month cycles.

Byers of RideNow has directed her 29 stores to be wary of the cards also. “In the three years that I’ve been sitting as finance director,” she says, “I have been pushing my guys harder and harder every single year to get off these credit cards. I think of them as the industry-killer.” She says about 80 percent of her company’s deals are now installment loans. “We knew this day was coming, so we jumped ship a long time ago.”

Not that Byers thinks of the other 20 percent of her business as insignificant. Revolving credit has had its place. “It’s nice having it around for the people that definitely can’t afford any more than $69 per month,” she says, “but we make it clear to them that it’s not to their benefit.”

Some stores may not have the know-how or technology to make a shift toward regular loans. “A lot of these mom-and-pops just don’t have the ability to do it,” Byers says. “You have to know how to format Lightspeed to print contracts or your hand-writing all this stuff.” Not to mention that some dealers don’t even own finance software.

This past summer, an HSBC rep told Dealernews that about four times more customers opt for revolving credit than for an installment loan. The bank would like to see a shift in the other direction. To this end, account executives will be visiting dealerships and offering F&I training.

The manufacturers have long encouraged installment loans through better participation on the loans. Jim Dirks of Killeen Powersports especially likes American Honda Finance, whose participation pays a lump sum pro-rated for the term of the loan. In comparison, revolving programs typically pay a percentage based on the amount financed. “These revolving ones, either you get nothing or you get a pittance,” he says.

Not surprisingly, Dirks also isn’t fond of revolving credit: “The American consumer is used to walking into stores, getting easy credit, getting easy terms, and not having to put any money up front. And they’ve buried themselves in their cars; they’ve buried themselves in their bikes. We’ve got to get away from this revolving nonsense.”

But what about the cards’ promotional value? “They’re just advertised solely to try to get your customers into the door,” says Byers, who adds that customers are sometimes angry when they don’t qualify and instead must pay the higher initial interest rate of an installment loan (which, again, is actually better for them). “There’s a little resistance, but that’s why our finance managers make some of the most money in the dealership,” she says. “They can really convince the customer that rate’s not that big of a deal.”

Plus, the promotional value of the cards might be waning. As far as zero/zero/zero deals go, some still exist, but today’s customer pays the bank for the deal instead of the other way around. “Now if you want to do zero-down, they raise your rate a point and a half,” says Maddox of City Cycle Sales. “So if you’re willing to take that hit, then you can do zero-down, but not too many people are opting to do that.”

Nick Arce of Northland Motorsports says he’s also been urging installment loans, which are now about 60 percent of his deals. He’d like it to increase them to 80 percent. “I’m pretty use to these changes,” he tells Dealernews. “It’s getting harder for us to lend, but I think maybe ethical practices and things like that will get a little bit better for us and the whole industry. It promotes repeat business. I definitely try to push installment loans. It’s just that the industry advertises the opposite.”

Converting well-qualified customers to installment loans isn’t easy. “The rates need to be competitive for one,” Arce says. “Even if somebody has a fairly decent credit score through HSBC, they’re looking at 13, 14 percent APR, and that just doesn’t fly for some people. Polaris and Honda are the only ones I’ve seen pushing toward low-rate installment loans.” Like many other dealerships, Arce has started using credit unions more often. But, he points out, “they are really hard to deal with in comparison to manufacturer financing.”

As Harley-Davidson has shown, excessively long terms and high rates on installment loans can also lead to equity problems. Says Martin of WOW: “The other big problem is we’re putting $35,000-to-$55,000-per-year-income households on to $25,000 Harleys on a 84-plus-month loan at $350 per month, and we’re wondering why they’re not paying their bills.” Interestingly, the only promo now on Harley’s Web site is for Sportsters.

Martin says finance companies have contacted him for his opinion. His suggestion? “Design a product for the middle.”

With fewer people qualifying for loans (and fewer sales, period), there’s also been a shift toward cash deals. San Diego’s House of Motorcycles, for example, tells us that about half its sales are now cash, whereas last summer a little more than two-thirds of deals were financed.

Fewer Lenders, Other Lenders

Some lenders are leaving the powersports market. A manager at Rick Fairless’ Strokers Dallas says that Bank of America and Wells Fargo will no longer finance the store’s American iron.

Other lenders are staying, but they’re pulling back. Many dealers — franchised and independent — have made good use of GE Money’s FUNancing credit cards and installment loans. But most of these dealers lost the programs Nov. 1. The financing giant has allowed only stores with certain franchises to keep the programs. (Click here for details.)

HSBC many months ago cancelled its own dealer-direct program, Rev Charger XL. Dealers say, however, that the manufacturers squashed the program years ago. “HSBC had a credit card program that was second to none,” says Heidi Byers of RideNow. “Every dealership in the country used the Rev Charger revolving. Then HSBC brought back Suzuki, and Suzuki really became the good card. Then they came out with some outrageous rates on the Polaris card. So Rev Charger was kind of left in the dust with a noncompete.”

As the usual lenders pull back or make their exit, others will no doubt fill in the slack. Says Bill Shenk of his 20 groups: “Money has dried up in a lot of sources, but guys are finding other sources. I’ve already heard rumblings of a couple of new sources that were auto sources that are looking at powersports.”

In an earlier story we reported on how XpressCredit is acting as a portal to thousands of automotive lenders that may someday choose to enter our market.

Several dealers also tell us they’re making greater use of the Drive Card offered by automotive lender Drive Financial — even though the firm charges a 26.99 percent discount fee.

And then there are the aforesaid credit unions and the discount lenders. Dealernews columnist Steve Zarwell wrote about discount lender Help Me Ride in our October issue. Dealers tell us that it charges about a 15 percent discount fee. See Zarwell’s column for a short list of other subprime lenders.

Speaking of Zarwell, in reference to the credit crisis within the industry, he says, “Not in my lifetime have I seen it worse.” Even subprime lenders are raising their standards. The finance manager at San Diego’s House of Motorcycles, for example, says he no longer bothers to send anything under 575 to his discount lenders.

And again, nontraditional lenders take more work. Another problem: Unlike captive finance programs, they require full insurance, which is especially troublesome for young people shopping for a sportbike.

Back-End Sales and Changing Approval Amounts

Besides vehicle sales, the credit crunch has also affected add-on sales like accessories and F&I products.

Bill Shenk says his 20 group dealers have a simple strategy for financing high-margin F&I products. “Our guys are doing better in finance than they have ever done,” he claims. “But part of that is that were selling the unit for less money, and then there is a little more money available then when the amount financed to add warranties and that stuff. Our guys sell a lot of maintenance at the time of sale.”

When it comes to add-ons, how banks calculate the overallowance is important. The revolving cards, of course, offer approved lines of open credit. Surprisingly, most HSBC installment amounts are also open. GE-backed installment loans, on the other hand, are based on the vehicle’s MSRP or book value. A customer with good credit may get 125 percent to make up for taxes, fees and add-ons.

But this may soon be changing. Dealers report that HSBC recently added to its installment programs a new low-end category, Tier E, good for only 95 percent of the MSRP.

As of today, HSBC may seem more lenient than GE when it comes to overallowance, but other factors come into play. Finance managers tell us, for example, that HSBC revolving programs don’t allow dealers to show GAP insurance on the contract. “They don’t want you to have GAP,” says a finance manager who asked to remain anonymous. “It’s the stupidest thing. Those banks like Honda, if it’s a $10,000 approval, they’ll give you $10,600 so you can specifically sell GAP — it’s in their best interest. HSBC won’t let you show it.”

Suzuki HSBC also cut back on perks this year. “If the customer signed the deal the day of the approval, we used to get a 10 percent overallowance for backend or accessories,” says Jim Dirks of Killeen Powersports. “We don’t get that anymore. I’m talking to a lot of F&I guys across the country every day, and it’s not a pretty picture out there.”

Outlook: Uncertain

As most dealers know, staying up to date on finance programs is a daily chore. We had to work hard to obtain just the information in this article, much of which is probably obsolete already.

“The banks have loopholes for everything,” Byers says. “They live in the gray. They never, ever truly spell out their policies and procedures because they want to give themselves the ability to change it any way, shape or form that they want it to benefit themselves.”

One could argue that such flexibility is needed in the rapidly changing finance world. Who’d have guessed just a year ago that credit would be this scarce?

Consultant Bill Shenk, however, is upbeat. “If the crisis had to happen,” he says, “it could not have happened at a better time in the powersports industry because Christmas is traditionally a cash market anyway. And so we’ve got until February to get this thing fixed.”

In the long term, a more diversified lending base and a shift toward installment loans will be good for the industry. Shenk and some of his 20 group dealers are even optimistic about this upcoming spring. “My guys think the tight money is temporary, and I tend to agree with them,” he says. “The financial institutions are going to close up 2008, and then they’re going to ask, ‘How are we going to make money to keep the door open in 2009?’”

Unfortunately, though, the credit crunch is just one part of the overall financial crisis. Even if the credit freeze thaws by next spring, the stock market crash, the rising unemployment rate, and the ailing housing and auto markets will keep some people from walking into your store in the first place.