THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Sunday, April 21, 1996 TAG: 9604200442
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: Long : 160 lines
The aggressive pursuit of new business last year left TFC Enterprises Inc. with a bad case of indigestion.
The Norfolk-based company, which specializes in making used-car loans to risky borrowers, ended up with an unexpectedly high level of sour loans. That triggered a fourth-quarter loss of $12.31 million and a loss of $6.45 million for the full year.
TFC wasn't the only auto-finance company bruised by competitive conditions during 1995. But due to the size of its loss, TFC was forced to accept more stringent terms from its key lenders.
George R. Kouri, TFC's president and chief executive officer, said the company was more circumspect about the loans it makes and evaluating the risks.
``We're moving a lot slower than we did in 1995,'' he said.
But for TFC and other companies lending to car buyers with tarnished credit histories, the competition is likely to remain heated. The industry's potential for above-average profits continues to lure new players, including some with significant resources:
Southern National Corp., the Winston-Salem-based bank holding company that owns Commerce Bank in Virginia Beach, agreed last month to buy Regional Acceptance Corp., a Greenville, N.C., auto-finance company, for about $167 million of Southern National stock. Regional Acceptance has 27 offices, including one in Virginia Beach.
AutoInfo Inc. of Fair Lawn, N.J., entered the business in December by buying a $31.7 million loan portfolio and certain other assets from Falk Finance Co. in Norfolk. Organized in 1992, Falk Finance provided financing for many customers of Norfolk-based used-car dealer Charlie Falk's Auto Wholesalers.
Ford Motor Credit Co., the finance subsidiary of the country's No. 2 automaker, said late last year that it would establish a separate unit in the latter half of 1996 for financing used-car purchases by high-risk borrowers. The Ford Motor Co. subsidiary already provides some financing for less creditworthy auto buyers.
By some estimates, the volume of ``sub-prime'' loans to individuals with checkered credit histories is already $60 billion to $70 billion. That's about a sixth of the more than $360 billion of auto loans outstanding.
Finance companies and securities analysts cite several forces propelling the demand for sub-prime loans. Because of job losses and missed bill payments, many individuals who once had good credit histories are having greater difficulty getting car loans from conventional lenders like banks and credit unions.
Some finance companies are more willing to provide loans to used-car buyers who never had access to bank credit.
``You're tapping into people who have paid cash for everything,'' said John J. Mason, a securities analyst with the Charlotte-based brokerage firm Interstate/Johnson Lane. ``These people have been driving a $2,000 car. New they can use that $1,000 or $2,000 for a downpayment on a $7,000 or $8,000 car'' and borrow the balance.
And some companies are willing to provide financing to individuals who have serious credit problems, including personal bankruptcies and auto repossessions on their records. Whatever the lending record of the prospective car buyer, TFC and other auto-finance companies buy their loans from used-car dealers instead of taking applications directly from individuals.
But the cost of credit from TFC and other finance companies isn't cheap. These lenders typically charge annual percentage rates ranging from the high teens to the mid-20s. That compares with interest rates of 9 percent to 12 percent on bank loans in Hampton Roads for someone buying a four-year-old car.
TFC and other auto-finance companies justify their higher rates by citing the greater likelihood that their borrowers will default. To control that, TFC and others install expensive telephone systems and hire employees to regularly ``remind'' borrowers about their car payments.
One problem that hobbled TFC last year was the inability of its Dallas regional service center to handle a heavier volume of loans and the calling activity, said Kouri, TFC's chief executive.
Those finance companies successful at evaluating the risk of their borrowers and holding down loan defaults can earn significantly higher returns than banks.
One widely used measure of bank profitability - return on assets - typically runs from 1 percent to 1 1/2 percent for many community and regional banks. Several auto-finance companies regularly generate a return on assets of 5 percent to 8 percent.
Southern National is interested in acquiring Regional Acceptance because the finance company will be able to take many of the loan applicants that Southern National's bank subsidiary turns down, said Gloyden Stewart, a Southern National spokesman.
The pending Southern National-Regional Acceptance deal is the second acquisition of this sort during the past year. In March 1995, Cleveland-based KeyCorp. bought a large auto lender, AutoFinance Group.
Securities analysts say they expect other banks to jump into this business, partly because banks have been scouting for new ways to generate loans and fee income.
The desire to make high-interest auto loans to riskier borrowers extends beyond banks. AutoInfo, which last year sold an information and computer-service business for repair shops and parts distributors, moved into the finance business aware of the loan-delinquency problems at TFC and some of its rivals, said William Wunderlich, AutoInfo's chief financial officer.
Before buying the Falk Finance portfolio in December for $5 million, AutoInfo talked for several months with companies and financial analysts. AutoInfo, Wunderlich said, figured it had the necessary capital, lines of credit and expertise to overcome the difficulties plaguing other auto-finance companies.
Since December, AutoFinance has expanded its lending to parts of southern Maryland, and it plans to push into North Carolina within the coming year, he said.
Meanwhile, TFC has been retrenching, and securities analysts say it's too early to predict the company's long-term prospects.
``They had a rough going, and they've taken some dramatic action to fix things,'' said David Stumpf, an analyst with the Richmond-based brokerage firm Wheat First Butcher Singer. However, ``the full impact is unknown right now.''
TFC is scheduled to release its results for the quarter ended March 31 during the first week of May.
TFC, which began in 1977 by making car loans to military enlisted personnel in Northern Virginia, again is concentrating on this sector and reducing its search for loans to civilian borrowers, Kouri said.
As part of its cost-cutting effort, TFC has trimmed its work force to about 400 from 431 at the end of 1995. After opening a loan-production office in San Diego last year, TFC has postponed plans to expand that into a regional service center.
However, the company will continue building its small-loan subsidiary, First Community Finance Inc., Kouri said. TFC opened six First Community offices, all in Virginia, during 1995. It expects to open six offices in North and South Carolina this year.
For now, the company is attempting to improve its analysis of loan applications and do a better job collecting the loans it has made. In recent months, TFC has installed a computerized scoring system to help employees evaluate loan applications in its Norfolk and Dallas offices.
``There's plenty of business out there,'' Kouri said. ``It's a matter of being disciplined enough not to get into the problem we got into.'' ILLUSTRATION: GRAPHIC
[For a copy of the graphic, see microfilm for this date.]
KEN WRIGHT
The Virginian-Pilot
STAFF FILE
George R. Kouri, right, TFC Enterprises' president and CEO, and the
firm's vice president, Joseph Becka.
SHOPPING TIPS
One reason why so many car buyers with checkered credit histories
get into trouble is impatience, said David Rubinstein, executive
director of the Virginia Poverty Law Center in Richmond.
``They go to one lot, maybe two. They find a car and want to
drive off with it, but they should resist the temptation,'' said
Rubinstein, whose organization regularly sees people with complaints
about used-car matters.
Rubinstein offers this advice:
Shop around for other sources of financing. Although someone may
have been turned down for a bank loan, there may be other sources of
financing available in addition to a loan provided through a car
dealer.
Have the car inspected by a shop of your choice.
Make sure you understand the terms of the loan.
Consider the full cost of the loan and not just the size of the
monthly payment.
by CNB