SALT LAKE CITY — After making some tough decisions and pulling back on loan volumes approved and dealer relationship numbers, Scot Seagrave, of Prestige Financial, said the company is ramping back up and reaching out to more dealers.

The plan is to double originations this year. Prestige Financial currently funds about $8 million in auto loans a month and is looking to maintain $15-$20 million a month for the rest of the year. The company hit a high of $40 million a month in 2007 and dropped to $3 million in 2009.

"When the year started we were down to 200 dealerships that were actively submitting applications to us. Unfortunately, we had to make some tough decisions over the last few years and stop doing business with quite a few dealers due to financing constraints. However, we have added about 150 stores in the last 90 days and are looking to add to that number throughout the year. We believe it will take quite a few more dealerships than it did in the past to accomplish the same amount of volume," Seagrave explained to SubPrime Auto Finance News last week.

Helping to drive this growth is a $150 million securitization deal reached in December.

Discussing this deal and the capital markets as a whole, Seagrave said, "In a way, our December securitization really marked the end of the ABS (asset-backed securities) drought for subprime auto, in that it was only the second deal in about a year and a half to succeed without relying on the government's Term Asset-Backed Loan Facility program or a third-party insurance policy. There's been a lot of ABS auto activity so far this year, including several sizable subprime deals that have gotten attractive prices.

"During the downturn, subprime auto, for the most part, outperformed many other securitized asset classes, as well as the market's expectations. So it proved to be very resilient, even during difficult times," he continued. "As a result, what we're seeing now is increased investor confidence in subprime auto, and with yields so narrow on prime securitizations, investors who are wanting a little more bang for their buck are looking to subprime auto as a place to put their money — even some investors who might not have considered the space a few years ago."

While he clarified that this doesn't mean that money is flowing at the same levels as it was in 2006 and 2007, he said subprime lenders who have "earned their stripes" can now access liquidity.

Given that the company plans to add about 200 more dealerships throughout the year, SubPrime Auto Finance News asked Seagrave what Prestige Financial looks for in dealerships it does business with.

"We focus on franchise dealerships that have a strong secondary finance office. We would like to think we do a pretty good job of partnering with the right stores and our selection process is a bit more like an interview. To maintain the high efficiencies our company is used to, we have to do a great job in picking the right dealerships to work with," he responded.

"We look to see if they currently have a secondary finance department, their processes, inventory, advertising budget for secondary and most importantly, we look at the people," he stressed. "Like anybody else, we want to enjoy working with our dealer partners. There are plenty of dealerships to choose from, so it's not necessary to do business with people that you don't have a good relationship with. Currently, we are in 13 states and interested dealerships can visit www.gopfs.com or call our internal marketing team at (888) 294-7837 to learn more. Additionally, we are in the preliminary stages of selecting new states to enter where we feel Prestige could have a positive impact."

Talking about the recession, Seagrave indicated that it gave the company a chance to get back to basics.

"We know how to underwrite subprime loans, and we tried to swim upstream into the near-prime segment — with its lower rates and discounts, higher LTVs and loan amounts, dealer participation, etc., and learned that's not what we do best," he pointed out. "Fortunately, we are still here to talk about it and I think we are truly a smarter company as a result and in the long run will be that much better.

"In my opinion, the key going forward is to stay true to our core underwriting principles, regardless of how tempting it may be to stretch. We have a good, solid subprime program that allows dealers to put some incremental car deals together. There may be some areas we loosen up over time, but I don't think it will be in core elements of how we underwrite a loan," he added.

Interestingly, about one-third of Prestige's loan volume comes from open Chapter 7 or 13 bankruptcies.

"A big piece of our business model is the open BK customer. Over the years, we have developed a pretty sound understanding of this customer and the process they go through. These loans are time consuming, but we feel this customer is certainly worthy of a second chance. And there are risks involved, but we are confident we know how to underwrite these loans, and our numbers back that up," Seagrave explained.

"We do not require any GPS devices or anything special from dealerships to finance the open BK customer. In fact, our program is exactly the same for the BK customer as it is for the non-BK customer. We get a customer we like and the dealership enjoys selling a car to a customer they ordinarily have to wait for. It's a win-win for both Prestige and the dealership. Most of our dealer base takes advantage of this and really goes after this customer. We feel we are the premier lender for the open BKs and look to continue servicing this growth segment of the population," he noted.

When it comes to underwriting decisions, Prestige tends to use automation where it makes sense, but most of the loan applications it receives are reviewed by live buyers and not a computer.

"We use a scorecard to determine the risk category and the pricing, so based on our underwriting policies, if the underwriter approves the loan, the scorecard determines the tier. Our risk team has done a great job of putting in place a scoring process that truly complements the expertise of our underwriters," Seagrave said.

Speaking specifically of the bankruptcy customers, Seagrave noted that the company uses software that allows associates to pull the court documents for the applicant's bankruptcy filing. Prestige's team also uses LexisNexis to assist funding auditors with verification.

Dealers who already work with Prestige or those interested in learning more, are invited to a dealer conference that will be held the third week in July — July 21-22.

"We will have about 40-50 dealerships from throughout the country out to Salt Lake to the Prestige headquarters. We will have some successful dealership present on open bankruptcy business, inventory, advertising and other pertinent topics. We do these every year and they are very successful. Our goal is to truly help the dealers increase their overall subprime business and not just the Prestige business," Seagrave pointed out.

The company has been hosting such dealer events for several years, according to the executive.

"We have some of our department heads speak to the dealers; we have various dealerships from throughout the country present to the group on what's working for them regarding inventory, advertising and processes. We teach them how to market to subprime customers and how to get more bankruptcy business. We also invite a couple of advertising firms to come in and give them additional options on marketing. Also, they get some quality time with their underwriters and funders and gain some valuable insight on how a finance company works," Seagrave explained.

"The more we can teach dealers on how we operate, the more successful our relationship will be. Above all, they get a chance to exchange ideas with other successful dealers from throughout the country and hopefully keep in contact with these guys and continue the dialogue when they get back to their stores," he continued.

So what might be around the bend for subprime auto finance companies in the future?

According to Seagrave, "I think lenders will certainly be smarter and more cautious in the short term. However, history has a funny way of repeating itself, so I wouldn't be shocked if volume levels got near the old highs down the road. I think we will see more finance companies enter this space and we certainly won't run out of customers, this combination will get volumes back up there. Access to capital will be the driver. Though credit markets have loosened, it's still tougher to get funds today than it was a few years. It will be an interesting couple of years."