11 Tips for Making It in Deep Subprime

While the bulk of the auto finance industry is considered “prime,” making loans to consumers with credit scores over  680, there is an entire world of originations in the so-called deep subprime sector.

The question is, how can lenders play in this sector, where credit scores never rise above 549, without getting burned — badly?

Charles Bradley, the chief executive of Consumer Portfolio Services, an unabashed deep subprime lender, offered several suggestions at the recent Auto Finance Summit. Here are 11 tips Bradley offered up:

1. Develop a predictive model and forget the Fico — the credit scoring service just isn’t built for deep subprime. You’ll have to develop your own scorecard.
2. Develop a program with a focus — deep subprime requires concentration.
3. Establish risk-based pricing — skillful pricing might be the most important element of successful deep subprime lending.
4. Balance the APR and the discount / participation — this goes to the pricing, too. A deep subprime lender can get the APR right, but the rate participation wrong.
5. Geographic concentration to a national footprint — deep subprime tends to not work on a national basis, but is rather more conducive to a geographically limited approach. And the advantageous yields make a regional focus economically viable.
6. Invest in technology for collections — never forget collections. Ever.
7. Centralized structure — some lenders have tried to operate a deep subprime venture with a decentralized approach; Bradley thinks that’s a mistake.
8. Stay ahead of staffing requirements
9. Get used to government oversight
10. Financing and securitization — no lender operation can survive without a robust funding strategy. Deep subprime is no exception.
11. Plan for the next recession — Said Bradley: “Make no mistake, it will come,” and in deep subprime such downturns can be more devastating. Be prepared.

And the reward for delving into deep subprime? Try average APRs in the range of 12.76% to 18.62%. That should make the effort worthwhile.