Sheffield: The Band Aid We've Been Looking For?

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Powersports finance has been fairly chaotic since summer 2008. Dealers report a shift toward revolving loans as installment underwriters change and OEMs attempt to attract more foot traffic with low monthly payments. But dealers also are turning toward credit unions. Plus, Sheffield Financial has structured its revolving programs to act as installment loans. We spoke with the company's CEO about this and the market in general. His comments were so encompassing that they take up the majority of this report. Also check out stories on another growing lender, a new "buy here, pay there" program, and our online collection of lender profiles.

Over the past seven months, Sheffield Financial has become something of a savior to some dealers. Multiline stores report that after rocky starts, the new programs for BRP, Kawasaki, Polaris and Suzuki (not to mention the programs already in place for Arctic Cat, KYMCO and the Piaggio Group) are buying better than most others. And this is just the beginning. Sheffield CEO Jack Snow says he plans to expand until Sheffield is the industry's principal lender.

Snow may have perfect timing: Unlike some lenders, Sheffield not only preaches responsibility but has built it into all its programs, even its revolving ones. Federal laws that will radically alter traditional revolving programs — laws making up the so-called credit card consumers' Bill of Rights — go live early next year. Snow says Sheffield will benefit because it already complies with most of the regulations.

Also refreshing is Snow's willingness to talk. During his interview with us, Show was surprisingly candid. Speaking in a hearty Southern drawl (the company's based in North Carolina) and repeatedly calling us "sir," he didn't hesitate to answer a single question. He addressed dealer complaints, as well as company policies on things such as loan participation, used-bike financing, full-coverage insurance and the company's eagerness to rehash deals.

A LEARNING CURVE

Snow's wife, Bonnie, founded Sheffield Financial in 1992, and he joined the venture a couple of months later. They started with lawn mower financing. About five years ago Sheffield entered the powersports industry by signing a contract with Arctic Cat. Although the Piaggio Group brands followed two or three years later, it was only this year that Sheffield began to finance motorcycles in volume. Snow admits that his company has had a lot to learn.

Dealers have noticed. One finance manager says that of the more than 50 applications he initially sent to Sheffield, it only approved two. He and managers at other stores wrote letters saying that if things didn't change, they would cancel the programs.

"We didn't know the motorcycle market," Snow admits. "We were overly cautious." In April he instructed his underwriters to pass along all declined applications to their supervisor. "That's when our world changed for the better with the dealers."

Sheffield uses credit scores only to establish pricing. Approvals are based primarily on the customer's background information. Good thing, too: Snow says that since November 2008 and every month since then, more than 50 percent of applicants have been subprime (having a score of 660 or less). Sheffield has denied the majority of these apps, but it's also bought a significant portion. "I can tell you we've financed some 600s and 580s," Snow says. "I looked at one this morning. He scored in the 400s — and that's rare — but he had 13 loans with us and paid us like clockwork. So I can't walk away from that customer."

Today, even the letter-writing finance manager is happy with the approval rates. In addition, he's so content with Sheffield's relatively low interest rates that he doesn't mind that the company doesn't pay points.

Snow doesn't believe in participation. "I try to put myself in the customer's shoes," he explains. "Let's say I go into a dealership today and buy an ATV, and I get financed at 11.95 percent and the dealer gets three points back. Then my brother, who is a better negotiator than I am, goes in with the same credit and gets 8.95 percent financing. I'm going to be upset. So I've stayed away from participation all these years, and I hopefully will continue to do so. It's the dealers' job to move iron, and it's my job to take calculated risks."

Two West Coast dealers have told us that Sheffield's business hours have caused problems. For example, until recently, Sheffield automatically filled in the amount financed into the contract. So if a California customer who was approved on a Monday for $13,000 used only $12,100 by 7:45 p.m., he'd have to wait until the next day for a new contract because Sheffield closes at 10:30 Eastern time (or 7:30 Pacific).

Snow says the process of automatically filling in the loan amount was inherited from the lawn mower industry, where the price is usually set early on. "We took pride in doing all the paperwork for the dealer," he says, noting that he's since learned that the powersports industry works in an opposite fashion. "So just this week we are changing that so that a dealer can go in and adjust the dollar amount himself, as long as it goes down and doesn't change the promo. We take everything to heart, and if it makes sense, we make changes as quickly as possible."

Sheffield also is considering a Western office. "We're just starting the planning stages now," Snow says, "and if it makes economical sense, and I'm sure it will, then we'll be opening an office probably within the next 12 to 14 months."

The only used bikes Sheffield finances are those certified by Suzuki Select. "We're discussing that internally now," Snow says. "Do we come out with a national used-bike program?"

Note, however, that Snow is not envisioning a used-bike program for everyone. "In the past we went dealer-direct, and it just didn't work out," he says, "so now everything we do is through the OEMs."

Manufacturer/lender relationships aren't what they used to be, Snow contends. "The OEMs are hesitant about signing exclusive with anybody today," he says. "They don't know what banks or finance companies are going to have the capital." Sheffield's Polaris and BRP jet boat programs, for example, are running alongside those of GE Money and U.S. Bank, respectively. Snow says he'd love eventually to take on Victory motorcycle financing. At the moment it's handled by GE, which also funded BRP powersports units alongside Sheffield before pulling out.

MORE RESPONSIBLE LENDING

Sheffield's revolving programs are really hybrid installment plans. The company sets the term, from 36 months to 72 months, and then adjusts the payment factor to the term. Snow says a common payment factor for lawn mowers and some powersports is 3 percent. "So if it's a $10,000 transaction, the payment is $300. It's going to be $300 today; it's going to be $300 on the last payment."

In addition, the Sheffield cards aren't intended for secondary purchases of small-ticket items. Dealers report that customers don't bother to use them this way because the transactions require a phone call for approval. "It's very rare," Snow agrees.

All Sheffield loans, installment and revolving, are capped at 125 percent of MSRP. "That's something we're evaluating on a quarterly basis," Snow says. "But I don't see it changing in the foreseeable future. If anything, it will go down. I don't see it going up at all."

As most dealers know, for years HSBC revolving programs advanced approved lines of credit. Dealers often piled on F&I items, accessories and negative trade-in equity, items that couldn't be recouped at auction. (HSBC has recently changed its ways and now caps all its programs at 130 percent.)

Snow says Sheffield does offer, to well-qualified customers, loans with low initial payments. But it won't allow the loan payments to be less than the interest charged, causing the outstanding balance to increase.

Snow explains his lending philosophy like this: "You have the OEM, you have the dealer, you have the customer who rides the products, and then you have Sheffield. If anybody in that chain gets a bad deal, the whole house of cards eventually is going to fall. So everybody has got to get it good. We need to make a profit, the dealer needs to make a profit, the OEMs certainly need to make a profit, and the fellow who puts his heinie on the seat needs to get a fair shake, too. I think that's one reason why Sheffield has been so successful. We haven't done a lot of these crazy promotions that you've seen in the past. Our bad debt has been probably the lowest in the industry."

Despite his bent toward responsibility, Sheffield doesn't require full-coverage insurance on any of its loans — a good thing especially for sportbike dealers. "We and the OEMs were concerned that it would deter sales, so we decided to require just liability," Snow says. "But when we send out our statements, we strongly suggest to end users that they insure every way possible."

What does Snow think about the credit card Bill of Rights recently signed by President Obama? "I actually think it's going to be good for the industry. It will have a dramatic effect on the revolving industry. No. 1, it's going to put all the finance companies on a level playing field." He gives an example of how some cards put customers on a default rate after one missed payment, and then never take them off of it. "Sheffield is not like that. With ours you have to be late twice in six months before we go to default rate, and then if you make six payments on time, you go back to our standard rate. We already comply with just about all the rules coming up."

The government requires compliance with most of the new regulations by Feb. 22, 2010. "I think the costs of some of the revolving programs are going to have to go up," Snow predicts. "And I think you're going to see a mad rush to installment."

Sheffield itself sells on service instead of price, Snow says. He doesn't allow his employees to have voice mail on their work phones because it's too impersonal, he says. Credit decisions are never instantaneous, though he says most are made within 15 minutes. "If we were just financing money, and we just turned on these computers and let them make all the decisions, and not have people answering the phones, we could sell money a lot cheaper. But I'm selling service."

All the dealers interviewed by Dealernews give high grades to Sheffield's customer service.

Finally, the company's financial stability is enhanced greatly by its parent company: BB&T, the 11th largest bank in the country. It bought Sheffield in 1997.

"We went from the lawn mower business and we added trailers," Snow says. "Now we're in the powersports business, and we've never exited a business. We specialize, and we're going to get the lion's share of powersports business before we look to another industry. We are going to be here for a long time."