Does Ford Credit Have a Better Idea?
Cocheo, Steve, ABA Banking Journal
Top auto financer believes loan concentration is a strength, not a weakness. Also, it shuns long-term auto loans and pushes short-term leases hard
Ford Motor Credit Co. just finished its fifth straight year of record earnings. A pioneer in consumer auto leasing, it has watched the rest of the industry--and consumers--latch onto the concept with vigor. In 1994 it achieved the milestone of becoming the world's largest auto-financing operation. So what could possibly be concerning William E. Odom, Ford Credit's chairman and a veteran who has seen the company through to its current successes?
"Everything is stretched out to the max right now--credit standards, loan terms, residuals on leases," says Odom of his industry. "It's not the most fun time to be trying to get new business."
Yet that's just what Odom has in mind for 1996. Two ways he plans to do this are by increasing the financing of other manufacturers' cars, and by readying a new subprime lending program to launch later this year. Still, much depends on whether auto lenders can weather the current potentially treacherous point in the credit cycle.
Terms are way too long
One of Odom's concerns is that some auto lenders have been offering terms of as long as 66, 72, and even 84 months--seven years--in their indirect loan programs.
"It's a horrible disservice to put anyone into a car loan for so long," says Odom, whose company led the way into two-year auto leases. "It's simply taking a customer who doesn't qualify for a $200 a month payment by going for a still-longer term. It's bad for the customer, it's bad for the dealer, it's bad for the lender, and it's bad for the manufacturer."
Continuing his criticism, Odom points out that it is likely that even the customer with a six-year loan won't have the balance on the car paid down to the vehicle's wholesale value until 55 or so months into the loan. "And yet they've got to be able to get into the wholesale range to be able to trade out of that vehicle and into another car," he explains.
Clearly, he says, he is worried about the rising level of consumer credit delinquencies in the U.S. (See "Consumer delinquencies continue to rise.") He's seen delinquencies rise in his own shop, and "I think delinquencies are a little out of hand, nationally."
Such talk would make the casual observer expect that Ford Credit plans to trim its sails for 1996. But this would mean ignoring Ford Credit's dual purposes in life--it exists not only to make profitable loans and leases, but to maintain the supply of credit to move cars out of Ford and Lincoln-Mercury factories and off the dealer lots.
"Our best solution for this situation is to fix the place where we want to be and not deviate very much at all, and therefore have better performance in collections when things are very good--and a little bit worse experience when the economy gets sour," says Odom.
This attitude, Odom continues, demonstrates to the dealer community that there is a consistent source of credit for their vehicles.
The key, says Odom, is anticipating when delinquencies will rise, as he believes Ford Credit has, and being prepared for it on the collections side by beefing up capacity.
Concentration is good
This kind of preparation--plus the provision of reserves--is the captive auto lender's answer to the kind of credit concentration that would give a bank examiner the heebie jeebies.
Indeed, over time Ford Credit has actually peeled off activities that provided some diversification. Numerous nonautomotive lending and leasing activities (where Odom got his start at Ford Credit) have been handed off to other members of the Ford family or are on their way out of the fold completely, as detailed in the Snapshot box. More recently, Ford Credit sold off a life insurance company that, among other things, sold a plain-vanilla annuity product that failed to meet expectations. …