Full-Spectrum Lending

Non-Prime Auto Financing Conference

June 5, 2008

© 2008J.D. Power and Associates,

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Information Sources

Power Information Network (PIN)

Syndicated Study
• Actual Franchised Dealer
2007 Dealer Financing Satisfaction
transaction data captured from
Study
their DMS
• Dealer feedback on more than 40
• 10,000 + dealers reporting more
automotive finance providers
than 5 Million transactions
• Evaluates all aspects of Dealer’s annually
experience – origination through
• Includes:
termination
• New and Used
• Lenders evaluated in 1. Prime transactions
Retail Credit 2. Sub Prime Retail • Vehicle data
Credit 3. Retail Leasing 4. Floor
• Consumer data
Planning 5. Account
• Trade in data
Management
• Finance contract data
• Credit score

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FICO® Scores in J.D Power and Associate Categories

Categories
1. Prime: > 680
2. Near Prime: 625 to 679
3. Sub Prime: < 624

FICO ® is a registered trademark of Fair Isaac Corporation

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 Background

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Drivers of a Full-Spectrum Business Model

Total U.S. New Vehicle Sales*

18
17.2M 17M
16.8M 16.9M
16.6M 16.5M
Vehicle Sales in Millions

16.1M
16

14

12

10
2001 2002 2003 2004 2005 2006 2007

Year of Vehicle Sale

* Projection based on JD Power forecasted data

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What is Full Spectrum Lending?

Prime

DOWNSTREAM
Merger/
Acquisition
UPSTREAM Organic
Growth

Subprime
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There is More !

Full Spectrum
Lending

Up-Stream Down
(Sub Prime Stream
to Mid (Prime to Sub
Prime ) Stream Prime)

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Full Spectrum Provider Business Mix : by FICO®
Score
Cumulative Report: Q1 2007-2008
Sub Prime Near Prime Prime
15%

10%

5%

0%
0 520 540 560 580 600 620 640 660 680 700 720 740 760 780 800+

Non Captives Upstream Downstream Midstream

FICO ® is a registered trademark of Fair Isaac Corporation Source: J.D. Power and Associates PIN Navigator data

© 2008 J.D. Power and Associates,

The McGraw-Hill Companies, Inc.
All Rights Reserved.
 What is the current status
of full-spectrum lending?

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2 Million unit sales decline since 2005

Total U.S. New Vehicle Sales*

18
17.2M 17M
16.8M 16.9M
Vehicle Sales in Millions

16.6M 16.5M
16.1M
16
14.9M

14

12

10
2001 2002 2003 2004 2005 2006 2007 2008

Year of Vehicle Sale

* Projection based on JD Power forecasted data

© 2008 J.D. Power and Associates,

The McGraw-Hill Companies, Inc.
All Rights Reserved.
What a year for Subprime…

“Subprime" 2007 Word of the year – American Dialect Society

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Challenges for UPSTREAM Lenders

Price

Liquidity
Risk

Upstream
(Sub-Prime to Prime)

Relationship
Processes

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Dealer’s want more than just Offering in Prime
Retail Credit
Prime Retail Credit

Termination
Policy/
Service
22% Finance
Application/ Provider
Approval Offering
Process 30%
24%
Credit
Personnel
24%

2007 Dealer Financing Satisfaction Study - weights

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Prime Retail Credit Index Score by Segment

Captives

Banks

Independents

Captive Advantage
Credit Unions

800 900 1000

Offering 30% Credit Personnel 24%
Application/Approval Process 24% Termination Policy/Service 22%

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Upstream Providers Opportunity for improvement
Prime Retail Credit Satisfaction

Overall Satisfaction
Downstream
Mid-Stream
Upstream

Offering

Credit Personnel

Application/Approval
Process

Termination
Policy/Service

500 600 700 800 900 1000

Source: J.D. Power and Associates 2007 DFS Study

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Challenges for DOWNSTREAM Lenders

Price

Portfolio

Downstream Risk

(Prime to Sub-Prime)

Processes Relationship

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68% of Dealer Satisfaction is People / Process &
Policy in Sub Prime Retail Credit
Sub-Prime Retail Credit

Termination
Policy/
Service
20%
Application/ Finance
Approval Provider
Process Offering
24% 32%

Credit
Personnel
23%

2007 Dealer Financing Satisfaction Study - weights

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Mid Stream Lenders are the Best
in Sub-Prime Retail Credit Satisfaction

Overall Satisfaction
Downstream
Mid-Stream
Upstream

Offering

Credit Personnel

Application/Approval
Process

Termination
Policy/Service

500 600 700 800 900 1000

Source: J.D. Power and Associates 2007 DFS Study

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 What is the future of
full-spectrum lending?

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 Satisfying Dealers Pays Off
RETAIL CREDIT: FUTURE BUSINESS WITH PROVIDER

High High

a cti on
ti sf
ll S a
Increase Future Business

ve r a
O

Mean Index Value

Low Low
Very Somewhat Neutral Somewhat Very Satisfied
Dissastisfied Dissastisfied Satisfied
Overall Satisfaction Rating
Source: J.D. Power and Associates 2006 Dealer Financing Satisfaction StudySM

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Dealer-Lender Dynamic

Dealer Lender

Market
Conditions

• Move the Metal • Grow / Profitability vs. Risk

• Sub Prime Customer • How much Sub prime
Base Growing business do I want?
• Losing Customers? • How deep can/should I buy?

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Downstream Provider Mix by FICO® Score

Q1: 2007 vs. 2008

Sub Prime Near Prime Prime
15%

10%

5%

0%
0 520 540 560 580 600 620 640 660 680 700 720 740 760 780 800+

Non Captives 2007 Non Captives 2008

Downstream 2007 Downstream 2008
FICO ® is a registered trademark of Fair Isaac Corporation Source: J.D. Power and Associates PIN Navigator data

© 2008 J.D. Power and Associates,

The McGraw-Hill Companies, Inc.
All Rights Reserved.
Upstream Provider Mix by FICO® Score

Q1: 2007 vs. 2008

15% Sub Prime Near Prime Prime

10%

5%

0%
0 520 540 560 580 600 620 640 660 680 700 720 740 760 780 800+
Non Captives 2007 Non Captives 2008
Upstream 2007 Upstream 2008
FICO ® is a registered trademark of Fair Isaac Corporation Source: J.D. Power and Associates PIN Navigator data

© 2008 J.D. Power and Associates,

The McGraw-Hill Companies, Inc.
All Rights Reserved.
Midstream Provider Mix by FICO® Score

Q1: 2007 vs. 2008

15%
Sub Prime Near Prime Prime

10%

5%

0%
0 520 540 560 580 600 620 640 660 680 700 720 740 760 780 800+
Non Captives 2007 Non Captives 2008
Midstream 2007 Midstream 2008
FICO ® is a registered trademark of Fair Isaac Corporation Source: J.D. Power and Associates PIN Navigator data

© 2008 J.D. Power and Associates,

The McGraw-Hill Companies, Inc.
All Rights Reserved.
Where is Full Spectrum Lending Headed?

Growth
Profitability Risk

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Where is Full Spectrum Lending Headed?

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Where is Full Spectrum Lending Headed?

Short Term
¾General “Retrenching”
¾Evaluate Current Business Model (ERM?)
¾Re Focus on Core Business
¾Reward > Risk

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Where is Full Spectrum Lending Headed?

Upstream Lenders
• Opportunity will be in own back yard
• Will Concentrate on Profitability rather than Growth

Midstream Lenders
• Opportunity will be on “higher end” Sub Prime
• Will see core business pushed to opposite sides

Downstream Lenders
• Best Opportunity for Full Spectrum Growth
• Will Focus on Prime

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The McGraw-Hill Companies, Inc.
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Where is Full Spectrum Lending Headed?

• Dealer May See Full Spectrum Lending

• The Industry Will Not See Full Spectrum Lending

© 2008 J.D. Power and Associates,

The McGraw-Hill Companies, Inc.
All Rights Reserved.
 Download this presentation at:
www.jdpower.com/corporate/finance/library.aspx

Questions:
Richard_Howse@JDPA.com

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The McGraw-Hill Companies, Inc.
All Rights Reserved.
Lower Rates are becoming more available

12%
10.0% 9.5%
10% 9.3%
8.8%
8.0%
8%
6%
4%
2%
0%
2004 2005 2006 2007 2008
New and Used Vehicle APR

© 2008 J.D. Power and Associates,

The McGraw-Hill Companies, Inc.
All Rights Reserved.