Franchised and independent auto dealers are taking a page from the buy here, pay here dealerships and holding their own paper. A recent informal survey of franchised and independent dealers in the Mid-Atlantic states revealed that as many as 20% of these dealers are originating and managing their own portfolios. The increased dealer interest in holding their own deals is the result of a pull-back in credit offered to their sub-prime to near-prime shoppers. While many dealers are thriving in managing these portfolios, many others have found that servicing customers can be time consuming, expensive, and frustrating. There are a number of options for dealers to increase their sales production and secure profit streams of duration and reap the benefits of a dealer managed portfolio in ways that match the dealerships appetite for risk.

The boldest dealers are originating and holding their notes to term. This of course requires a great deal of legal, compliance, operational, accounting, and systems support to do well. Dealers with the requisite capital and know-how can thrive on solid returns. Many dealers have found taking the time to get a positive financial return along with the cost and complexity to be too much to take on and, most importantly, it takes them away from their core focus of selling cars.

The market for the purchase of dealer originated portfolios for these securities once they have seasoned (generally 90 plus days) is growing and attracting more buyers. To dealers, this approach provides a nice parachute from their portfolios that creates positive cash flow. The market for deep sub-prime paper right now is quite active and investors of all types are actively buying through brokers and emerging online trading networks. Dealers that pursue this strategy must be comfortable with the risk of not getting their desired return or even getting a sale.

Most recently, a number of innovative options have come to market that assist dealers in managing their own portfolios while minimizing risk and commitment. Dealers now have a number of options to outsource the servicing of their portfolio to servicing and collections professionals. These solutions take the hassle of licensing, legal, strategic, staffing, and system management off the dealer’s plate while allowing the dealer to reap the rewards and profit stream of duration for a servicing fee. Many of these solutions also offer a hybrid that allows the dealers to sell this portfolio once it is seasoned.

Dealer managed portfolios are no longer tools of necessity, but ways for dealers to increase production and increase their long-term customer base. Building profit streams of duration takes time and patience, and the right culture must be propagated within dealerships. Dealers will find that engaging the dealer portfolio will drive a culture of risk and fraud management in the F&I office that will translate into greater overall returns.

Joel Kennedy is EVP/COO of Pelican Resource Group, LLC (www.pelicanresourcegroup.com), an innovative lending and servicing partner currently operating in the Mid-Atlantic region. For more information please call 888-989-9688 x702.