The new world of consumer finance
Consumer finance has largely returned to the marine industry; however, it is very different than it was during its pre-recession prosperity.
There was a time when just about anyone could get financing for a new boat, and consequently, models were flying off the showroom floor. It was a flawed system, however, that led to the recession and recoil from previously generous lenders.
Today, financing has made a comeback, as availability is near pre-recession levels, but it is being conducted in a manner that adheres more strictly to lending guidelines and newly enacted regulations.
Although banks are nowhere near – and possible never will be – pre-recession volumes, banks have re-entered or increased their aggressiveness in the issuing of boat loans.
During the downturn, banks exited recreational financing as loan defaults in all industries increased exponentially. Today, many are coming back in as they are again in a positive position and want to make money on lending.
“We just came out of the boat show in Miami where we saw the availability of financing is 10 fold over what it was a year ago,” Vernon Blanc, national sales director at Newcoast Financial Services & Dealer Financial Services Group, said. “It has reversed pace about 180 degrees.”
At Priority One Financial Services, which provides financial services to dealerships, much of this return to business has been in the non-prime market, especially as prime lenders became more credit-score driven.
Lorraine Mariotti, vice president of lending at Priority One, said customers with credit scores in the 680-to-720 range were once prime lending candidates; however, that is no longer always the case as the majority of those customers are now considered non-prime by lenders. By Priority One concentrating on their non-prime segment of business, Mariotti said the ratio of funding loans for those with credit scores below 679 has increased by over 75 percent in the last three years for Priority One dealers.
Jeff Backus, vice president for First Approval Source, said credit unions have been a major contributor to this growth. In the last two years, he said he noticed a sharp increase in subprime loans from credit unions, which formerly were hesitant to give loans for longer than five years. Today, many will approve loans as long as 20 years.
“I think the biggest thing is having multiple lenders to fit every deal because every deal is having to be looked at in its own way,” Backus said.
If it were up to Mariotti, there would be even more lenders in the non-prime market, specifically for those who serve credit ratings between 650 and 700 – a market that currently qualifies for upwards of 18-percent interest rates. The lack of mid-non-prime lenders offering interest rates that are affordable forces the credit range to miss out on better non-prime rates and could possibly deter the sale itself, she said.
Michael Bryant, president of the National Marine Bankers Association and a founder of Trident Funding Corporation, agrees there is a lack of funding for the “middle” credit candidates, as banks are competing over the best financially qualified candidates while turning down those close to being qualified.
“They all want to buy the best credits, but there is only so many to go around,” Bryant said.
Following a recession when many customers accrued a blemish on their credit report, whether from a foreclosed home or a modification program, non-prime markets are crucial for many who would like to purchase a boat. These customers are qualified today, but the past prevents them from receiving a prime-rate loan, underscoring the importance of today’s non-prime lenders, according to Bryant.
Due to multiple reasons, including higher than normal delinquency and losses on marine loan portfolios, large prime lenders that left the marine market during the recession are hesitant to return, Mariotti said.
The lack of competition in the prime market has left little pressure on existing prime lenders to improve their programs, according to Mariotti, who said practices like adding full manufacturer discounts into the advance guidelines for marine loans have not returned since the recession for most lenders.
Crossing T’s and dotting I’s
There was a time when lenders took key information about loan applicants at face value, like income for example. Today, many lenders are not as trusting as background checks are completed and loan guidelines are strictly followed.
“Some lenders recognized that for whatever reason there for awhile many got away from the traditional underwriting practices, and that wasn’t the best plan,” Scott Anderson, vice president of marketing for Merrick Bank, said.
Anderson said the industry seems to have learned from this period as tactics like accepting small down payments, taking stated income and financing aggressive advances against collateral value had a negative impact on many loan portfolios.
Blanc said many lenders are now requiring verification of an applicant’s income source, a decent credit profile and proof of liquidity. Furthermore, the guidelines stating a required number on the various pieces of a financial resume are strictly followed – something that was missing in the past.
“If your credit is not up to par, if your income is not up to par, if the type of boat you want to buy is not in their guidelines … they are not going to budge,” Blanc said.
For Mariotti, whose job is to facilitate loans for applicants, some of these guidelines are too stringent, primarily the requirement of liquidity.
Loans more than $150,000 require a certain amount of liquidity on an applicant’s personal financial statement. Although she can understand the lender’s perspective of minimizing risk, she argues the practicality of the guideline — since cash in the bank does not mean it will be used when problems arise with payments.
“Some clients have extremely high net worth, but they don’t carry a lot of personal liquidity – maybe they keep it in their business, which could prevent that client from getting a loan,” Mariotti said.
Not speaking directly to liquidity guidelines, Bryant sees overall guideline adherence as a positive to an industry that cannot return to the days of stated income and the use of second or third mortgages to purchase boats.
“I don’t know when or if that will even return, but in reality it should not,” he said.
Conforming to the rules
On June 21, 2010, the Dodd-Frank Act was passed to ensure accountability and transparency by the nation’s financial system. The provisions protect the consumer, but many recreational lenders believe it is far too restrictive.
“It has had a tremendous effect, we are so over regulated that it is almost choking the banking systems,” John Haymond, vice president of marketing for Medallion Bank, said. “The amount of time and money that we have to spend on compliance issues is very cumbersome.”
Although regulation preventing the “too-big-to-fail” mentality that caused the recession is welcomed, Blanc says some regulations that are necessary in the mortgage industry are not necessary in recreational markets. The effect, according to Blanc, is that some products can no longer be offered.
Financing for live-aboard vessels, for example, is more difficult to find due to regulations related to the mortgage lending industry crossing over with recreational lending.
Haymond said banks are now hiring compliance staff in order to keep up with regulations, which he says is an expense that must eventually trickle down to the consumer.
“You are hiring so many experienced, technical compliance officers in these banks … These costs have to be passed on somewhere, and I can only assume that these costs are being offset through increased costs in their loan products,” he said.
Also, exceptions to guidelines were quite common years ago, but Mariotti said they are now mostly nonexistent due to the required documentation that comes with it in order to prevent discrimination.
Bryant believes the regulations will also limit the choices applicants have, as those who previously served certain applicants in the non-prime industry are unable to keep up with the red tape seen for that specific market.
“I see what they are trying to achieve – protecting a customer that can be taken advantage of, charging a higher fee than they could get otherwise – but in their effort, they will limit the choices customers have for lending,” he said.