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Wednesday, October 28, 2009

The biggest change in the Auto Finance Industry has been...


You may have no idea what WOR means, unless you've been around since the early 80s.

When I started at Chrysler Credit there was a clause in most auto finance contracts called "Recourse".

Recourse meant that the customer, the debtor, the guy buying AND Financing the car, was ultimately the responsibility of the dealership if he went beyond the point of basic delinquency.

It's been a while, so my memory may be a bit rusty, but I believe most deals were 90 or 120 day recourse. That meant that when the customer bought the car at the dealership and they sent us the credit app and contract to consider the customer for a loan, we knew that the dealer was also a part of that credit decision as they would be on the hook for the FULL BALANCE if the customer went into default beyond 90 or 120 days.

When we got to day 60 of the delinquency we would notify the dealership that the customer was late on his payment(s) and they were being put on notice, and that we could, and would, be asking for a payoff of the loan if that delinquency was not immediately corrected. Sometimes we let the dealer slide a few months and we allowed them to make a payment or two versus having to pay off the entire loan.

Can you imagine the ramifications of this in today's market? Think about how that would have affected the sub prime mortgage industry if the brokers would have ultimately been responsible to the bank if the guy buying the house defaulted. Would they have been so quick to falsify the documentation to get the loan approved if they knew they ultimately could and would be responsible? Of course not. Would they have been selling everyone who could walk, talk and sign a contract a house, if they would be responsible of the person went into default? Of course not.

At Chrysler, our dealers were our partners. When WOR, or With Out Recourse paper became the rule instead of the exception, that partnership went away. It started to go to WOR when some finance companies offered WOR as an alternative to Recourse contracts, and the rates were competitive enough that the dealer would start placing those loans to finance companies offering WOR contracts. Pretty soon, Chrysler and all the other major lenders had no choice but to offer WOR contracts.

With WOR, the dealership no longer had any interest in what deals they sent us, how those loans would perform, how we collected payments on their customers, etc. Once the deal was financed, the dealer was off the hook, so what was their motivation to make sure they got good reference numbers, valid POE info, a Co-Signer who could and would pay, etc? There was no motivation, and when that happened, the quality of the paperwork dealerships would collect in terms of customer documentation started to decline.

I believe the dealerships were also responsible when we repossessed a car before the 90 or 120th day. We'd bring the dealer the car instead of taking it to an auction and the dealer would pay off our contract.

At the same time this happened, Chrysler and all the other major lenders started consolidating to large call centers, another major change. This further segregated the finance company from the dealership.

It's interesting to see Chase getting back to a local branch model in regard to their auto finance collection strategy. As time goes on, I believe you will see this model succeed for them, and you may also see other lenders try and look to copy what they've done when they acquired WAMU and took over their branches, in many cases setting up auto finance collection centers. I've often wondered if they thought of this as a pre-acquisition strategy, or as a "what do we do with all these branches?" after the acquisition strategy?

As banks and lenders continue to keep their belts tightened, will we ever see Recourse paper come back?

If it does, I think it would be a way to rebuild the bond between car dealers and finance companies, especially for captive lenders who so greatly rely on each other. I believe the industry should revisit the benefits this relationship used to bring each other, and maybe this could be the catalyst to rebuilding a stronger auto finance model in the future. Now that banks hold more cards in regard to lending, there may not be a better opportunity to revisit recourse lending.

John Lewis