FARMINGTON HILLS, Mich. — Though the recovery has been stalling and the U.S. credit downgrade from Standard's & Poor's certainly didn't help,  all four major lender platforms — RouteOne, DealerTrack, Wolter Kluwer's AppOne and Finance Express — report to SubPrime Auto Finance News they are seeing application volumes climb. And this bodes well for the automotive industry's recovery.

Driving the pullback in applications over the last few years were a variety of factors, including dealers going out of business, the credit market collapse and the withdrawal of some lenders from the auto loan marketplace.

For those that weathered the downturn, underwriting tends to be stricter, but many of these lenders are now growing, as the several executives with each lender platform can attest. And dealers can leverage these platforms to build lender relationships and drive approvals.

"We, like everyone else at the time (2008) saw a significant drop in application volume due to the economic climate, dealer/lender contraction, declining auto sales and dealership closings," Mike Jurecki, RouteOne chief executive officer, explained to SubPrime Auto Finance News.

"The drop began in the second quarter of 2008 and lasted through the first quarter of 2010 (with the exception of Cash for Clunkers in the 3Q and 4W 2009); since then, volumes have, for the most part, grown on a consistent basis," he added.

Over at DealerTrack, Robert Granados, vice president and general manager of finance solutions, pointed out, "We most certainly did see a drop as OEMs reduced their franchise dealer networks and lenders withdrew from the markets and downsized. This has led to limited access to credit."

He went on to explain, "During this period, activity dropped at both large and small lenders because there was no or limited access to credit in market. Many smaller lenders closed their doors, but the biggest impact was felt in the market by the larger lenders, whose reduced activity dramatically shook and changed the foundation of the market."

Chet Heughan, director of AppOne Risk Mitigation Services for Wolters Kluwer Financial Services' Indirect Lending business, noted, "Like many businesses in this industry, we noticed a drop in the number of active dealers due to the fact that many shut their doors as the markets suffered. Other dealers simply cut costs or scaled back their operations due to the tight credit market and lack of inventory."

Tara Huber, of Finance Express, also mentioned, "We definitely saw a drop in dealers on our platform when the economy crashed. Dealers were going out of business right and left and we were not immune to seeing cancellations. In our system, we can see on a monthly basis how many deals are being done by outside financing and saw more cash and in-house deals being done. Banks became very stringent on the type of paper they would buy and pulled back dramatically as to how much or what type of customer they would approve. Throughout the recession dealers were just happy to be in business."

Growth Returns as Platform Activity Climbs

While dealers and lenders appeared happy to just weather the tough times, this is slowly changing. A recovery is now underway in the market, according all four platforms.

"Dealers have come back slowly," Huber pointed out. "I think the market was essentially weeded out and we were left with a very stable steady group of dealers. Dealers are back to being more in a growing phase again, but in a smaller capacity. They are looking to grow and expand, but in more calculated ways. Each month our dealer volume goes up and so do our lender transactions, but overall, I would see we are seeing normal car-buying trends amongst the dealers. You see a spike at tax season, cooled off a little in the summer, picking back up in the fall and dead around Christmas."

At AppOne, Heughan confirmed the company is "definitely seeing signs of a market recovery."

"New dealerships are opening once again and we have seen a growing interest in our AppOne platform, which automates the indirect lending, credit approval and loan documentation compliance processes for lenders and the auto, RV, marine and powersports dealers they work with. This seems to be in direct relation to the gradual loosening of the auto credit markets and the availability of inventory," Heughan explained.

He later added, "We are now seeing new lenders emerge, especially in the non-prime and subprime markets. Many of these are being backed by large dealer groups in an effort to capture more revenue on the sales they originate. Others are being funded by private equity firms. As a result, the non-prime and subprime market is likely to become more competitive in the near future than the prime market, which has remained constant for some time with extremely low rates."

Granados, of DealerTrack, said much the same thing as Huber and Heughan, adding, "Large lenders have come back strong and are actively growing their dealer base and market share. Midsize lenders are competing very well in their regions and small lenders are playing a key role in their niche markets. In relation to application volume, dealers have become disciplined about their look for approval and look-to-book ratios. This is a result of the pullback from lenders that were looking for efficiency and profitability of their business and portfolios. The growth is coming from consumer demand, which leads to more transactions and unit sales."

He went on to explain, "We are seeing more and more non-prime activity, and the subprime activity is beginning to come back; both overall good signs for the marketplace. New subprime lenders are entering the market and the midsize and large lenders are aggressively growing their market share."

Meanwhile, Jurecki ,at RouteOne, said his company took the downturn as an opportunity to educate its dealer members.

Moreover, he said RouteOne continues to experience solid volumes from dealers. Its number of applications per dealer is rising, which indicates consumer confidence is also returning at dealerships.

Jurecki also noted a change in the atmosphere at trade shows, saying that attendance is growing for both dealers and lenders and that both groups appear more "positive about the future of their enterprise; they are cautiously optimistic about their future."

 "We are also seeing new entrants (lenders) to the marketplace, which was extremely rare during the downturn," Jurecki added.

Advice to Dealers for Growing Application Approvals and Ultimately Sales

So, for dealers looking to leverage these platforms even more to drive more approvals and more sales, SubPrime Auto Finance News specifically asked each executive for advice.

At DealerTrack, Granados, suggested dealers continue to focus on efficiency and quality.

"This will lead to a strong and fruitful relationship with their lender partners. Second, dealers have access to tools and services on our platform that enable them to search for available lenders in their specific area. We have the broadest subprime and nonprime lender network in the marketplace and will be happy to assist them in finding and establishing new lender relationships," he said.

For AppOne, Heughan gave s specific list of questions that dealers should ask themselves:

—Do we have the right vehicles to gain financing? According to the AppOne executive, lenders will most definitely be interested in inventory and many subprime lenders will not finance certain makes or models due to perceived faster depreciation curves, but give preferential treatment to other makes and models. Some lenders have strict maximum mileage caps, he added.

—Are vehicles in the right price range to get customers to the correct payment-to-income ratio? If your average customer's income is $2,000 per month, Heughan said, and all a dealer has on the lot is $20,000 vehicles, the dealer will have a hard time getting the 8 to 12 percent payment-to-income ratio that many subprime lenders are looking for. "Remember that many subprime lenders offer shorter terms and lower loan-to-value percentages," he stressed.

—What is the finance strategy? For example, if the strategy is to sell GAP and warranty on a large percentage of transactions, the dealer needs to be working with lenders that have programs to fit the selling style, Heughan pointed out. Moreover, he added that if the dealer is small with only a few finance deals each month, it's important to choose lenders that support that selling and revenue strategy.

—Is the dealership meeting regulatory compliance requirements? "Profitable dealers will be those who understanding the necessity of meeting compliance requirements and have put processes in place to mitigate risk. This not only helps build successful lender relationships now, but also maintains those relationships in the months and years to come," the AppOne executive said.

For Jurecki, the key to growing relationships and approvals is understanding a finance source's target customers and policies. Following the lender's guidelines can "make or break a dealer's approval success rate."

"Understanding how to best package the deal to create a positive customer experience and speed funding. Build real relationships with your lenders; get to know them and request that they train and educate your staff as need, the more you put into it, the more you'll both get out of it," the RouteOne CEO suggested.

"Be selective about your lender partnerships. Understand that finance sources are very tightly managing risk and cost. Look-to-book is a critical metric for lenders today, understand this and manage it appropriately. Be accurate and verify contract accuracy, if there's a problem, bring it up immediately and work through it in partnership," Jurecki advised.