After 50 years in auto finance, Fireside Bank is shutting its doors. Parent company Unitrin Inc., a Chicago-based property and casualty insurer, announced yesterday that its subprime auto lending subsidiary had stopped originating loans.
Fireside, which employed 730 people at yearend 2008, has a loan portfolio in excess of $1 billion, making it one of the top financiers in the nation. It will continue to service its portfolio, winding down operations in the next few years. During that time, Unitrin hopes to recoup its $240 million investment in Fireside.
So what happened to Fireside? It lost $22.3 million last year and $38.8 million in 2007.
Though the Pleasanton, Calif.-based lender did business in 19 states, 65% of originations were concentrated in California, one of the states hardest hit by housing declines and rising unemployment.
Also, Fireside is an industrial bank, regulated by the California Department of Financial Institutions and subject to FDIC regulation. To that end, Fireside is required to maintain a certain level of reserves in cases of losses.
Last year, Fireside’s provision for loan losses included $77.7 million for loans originated in 2008 and a $32.3 million increase to estimated loss expectations for loans originated in 2007 and 2006. The reason for the higher losses, as set forth in Unitrin’s annual report: They were caused “primarily by a higher level of gross chargeoff and lower recovery rates due to higher levels of unemployment, lower auction prices on repossessed vehicles, and negative general economic conditions.”
The losses occurred despite efforts to mitigate risk with an improved risk-based-pricing and credit-scoring model implemented in early 2008, which “resulted in the prospective elimination of certain unprofitable segments of business written in prior years,” according to the 10K.
So what is it that makes a successful auto finance company? Fireside had been offering auto loans for half a century, yet was forced to retreat because of unprecedented turmoil in the auto sector and general economy. What might it have done differently to remain in the game, or what can other lenders learn from its demise?
I look forward to your feedback.
Thank you for your feedback, Marcie. I agree, there will always be a hand-full of lenders out there that will do indirect auto finance. All this said, however, I believe as the economy recovers, I think you’ll see the lenders who exited indirect get back in the game but will do so going in as a direct lender as opposed to indirect. Just my thoughts as I look into the future through my crystal ball.
Thanks for the predictions, Hale. I’m curious to see how things shape up…
Hale – I agree with you completely in regards to the risk challenges of direct vs. indirect. There are significant differences in performance across the credit spectrum when comparing indirect to direct portfolios. The reason that dealers do not like direct lending is because it takes them out of the game in regards to marking up the rate. The higher rate that the customer ends up paying for indirect financing along with sometimes aggressive Sales/F&I people – results in higher losses in general for indirect. If you believe that eventually business models that are transparent and consumer friendly are going to win – then a much larger share of the market will evolve into direct auto financing.
Most Indirect auto lending is “collateral lending”. A lender needs to understand car values and be prepared to act fast when borrowers default. Pay or Walk (especially with leases). And they need to work on their repo resale approach to max out the value.
An example of imprudence is that over 20 years ago, almost 50% of the non-business cars on the road in California were leased. I do not know how high it is today. There is no way that 50% of the people in California or anywhere qualify for a lease (OK their FICO scores were artificially inflated due to home equity realizations through sale or refinance to pay their debt on time)-yet some financiers thought so – and the bloodbath continues. It usually gets down to basics – good credit administration, good underwriting, good collateral. Migration to credit models also migrates underwriting to actuarial analysts instead of lenders. Analysts look backward and lenders can look forward.
Why not just disable the vehicle when it’s parked and then inform the recovery agent of the location so they can go and pick it up. Seems simple to me.