What Buy Here, Pay Here Operators Should Learn From The Subprime Mortgage Crisis

Over the last 30 days, I have been asked numerous times if the subprime mortgage meltdown will extend to subprime auto loans. A few months ago, I wrote an article called, When Underwriters Become Undertakers. In retrospect, my comments might have been better targeted at the subprime mortgage market rather than the buy here, pay here industry. Both industries, however, face the same problem: If you sell a customer more home than they can afford, a default will soon follow-and the same is true for vehicles!

What are the lessons we can learn from the subprime mortgage meltdown?

  1. Poor underwriting decisions multiply into huge losses.

  2. The individuals responsible for the bad decisions (the underwriters themselves) are often not held accountable.

  3. Bad credit decisions should not be rewarded.

  4. It takes time for problems to surface, but ultimately someone always pays a huge price for mistakes.

What can we learn from these lessons? Optimistic financing needs a reality check!

In the subprime mortgage market, the mortgage brokers who extended credit to individuals that couldnt repay the loans are no longer in business. Many have moved onto other things but hefty commission checks and large pay stubs leave fond memories. Although the Federal Reserve has recently infused billions of dollars into the capital markets to stabilize the situation, all of us will pay for these poor decisions for a long time to come.

What can the buy here, pay here industry do to avoid these same problems? The answer lies in underwriting.


  1. Good underwriting includes both gathering and analyzing customer information before originating the deal. Gathering the information involves implementing procedures and analyzing it takes training and knowledge.

  2. The information gathered from customers must be independently verified if it is being used in a credit granting decision.

  3. Underwriting decisions should be monitored by analyzing portfolio performance. Static pool and loss/liquidation calculations help identify favorable and unfavorable trends before it is too late.

  4. Studying portfolio losses can identify underwriting mistakes so that timely adjustments can be made in future underwriting decisions.

  5. Building solid underwriting systems and processes helps ensure consistency and improves collections. Customized credit scoring systems reduce credit granting mistakes.

  6. Underwriters must be properly trained and held accountable for their decisions. Pay plans should be structured so repossessions are charged back against commissions. That way, everyone shares the pain for credit mistakes!

Good portfolios are built over time, not overnight. Explosive growth is frequently followed by significant charge-offs. Building a solid portfolio takes many years.

Ironically, the significant number of defaults in the subprime mortgage market will likely increase the number of customers in the subprime auto market. Although more opportunities will arise for the buy here, pay here industry to grow, good underwriting must now take center stage. The buy here, pay here industry must learn from the mistakes made in the subprime mortgage market and not replicate them. The subprime cemetery will fill up fast with those who don’t!

Kenneth B. Shilson, CPA, is a principal in Shilson, Goldberg, Cheung &amp- Associates, LLP (www.kenshilson.com) and president of Subprime Analytics (www.subanalytics.com), which performs electronic portfolio analysis. Mr. Shilson is also the founder of NABD, visit www.bhphinfo.com or call 713-290-8171.

Kenneth B. Shilson


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