Academic journal article ABA Banking Journal

Car Loans: Still Good Business

Academic journal article ABA Banking Journal

Car Loans: Still Good Business

Article excerpt

Car loans: still good business

Reports of the death of bank auto lending were highly exaggerated

Auto dealer finance, also known as indirect auto lending or floor planning, is no longer a banking epithet. Commercial banks are expanding market share and are increasingly standing tough against the challenge from the below-market rates offered by the financing subsidiaries of the major auto manufacturers.

According to figures released by the Federal Reserve Board, commercial banks controlled 43% of all auto finance loans outstanding, a 2% increase from 1987's figure and the first increase of market share since the 1984 figure of 48%.

The Federal Reserve figures found the captive financing subsidiaries of General Motors Corp., Chrysler Corp., and Ford Motor Co. captured 33% of the market, a 4% drop from 1987, while credit unions and thrifts trailed with 17% and 7% market share, respectively, representing 1% increases for both groups from 1987 figures. Going national. How have banks been able to accomplish this? One institution, Buffalo-based Marine Midland Bank, implemented the boldest strategy of all: national expansion. In its home state of New York, this bank was for long the largest auto lender among banks and the second-largest auto lender of any type after General Motors Acceptance Corp.

After decades of experience in dealer finance in New York, Marine resolved to build on that experience elsewhere. Three years ago, the bank created a new subsidiary, Marine Midland Automotive Financial Corp. (MMAFC) to establish regional centers across the country to finance dealers. The dealers in turn would finance retail customers.

Today, MMAFC has over $6 billion in assets, 14 regional centers, and is the largest bank financer of automobiles in the U.S. Only the captive finance companies of the Big Three automakers hold a larger share of the business than Marine.

Marine has learned how to exploit niches. It went aggressively after the foreign car market, signing up numerous importers, so that MMAFC became in effect the captive finance company for many of the imports. Among the carmakers so served are Austin Rover, Mazda, Porsche, Saab, and Subaru.

And what of the present, and the future? After an extremely high growth rate of the past few years, MMAFC has seen the rate moderate somewhat, says company president Robert Reich. Although he still expects healthy growth, Reich notes that the company is now thinking in terms of fewer but larger regional centers. California scene. Bank of America once utterly dominated auto lending, including dealer finance, in California. The bank still commands the California market, although competition, especially from the Big Three captives, has reduced its lead somewhat to roughly 40%.

According to David McCoy, senior vice-president, dealer corporate services at B of A, "This is a good, profitable business if you go about it in the right way."

For example, B of A, like Marine, enhances the total profitability of'dealer relationships by getting their deposits and by providing them not only with floor planning but also real estate loans, term loans, and letters of credit.

B of A sold off a leasing subsidiary some years ago, but is now looking at getting back in that business, meanwhile offering lines of credit to dealers who offer leasing to retail customers. The bank is also active in financing foreign cars, which account for about half the California market.

McCoy notes the cyclical nature of auto lending and says, "You absolutely must screen the dealers you do business with carefully. You want the quality borrowers, because they have the staying power to get through the cycles.

"The other side of that coin," McCoy continues, "is that the bank must stay committed to the dealers. In this business, lots of banks are coming and going, in and out. We are in the business for the long term, and our dealers understand and appreciate this. …

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