THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Monday, September 11, 1995 TAG: 9509090209
SECTION: BUSINESS WEEKLY PAGE: 10 EDITION: FINAL
TYPE: Cover Story
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: Long : 207 lines
The caller from New Hampshire was late with her monthly payment and wanted to know the status of her car loan.
With a couple of key strokes, Kimberly Harris called up the borrower's payment history and loan record on a computer terminal.
Harris, one of 50 account representatives in The Finance Co.'s collections department in Norfolk, confirmed that the woman still owed $3,000.
After explaining some terms on the caller's monthly statement, Harris asked about the condition of her car and whether her address had changed.
The conversation was typical of hundreds that Harris and other account representatives conduct daily at The Finance Co.'s regional service center in the Norfolk Commerce Park.
Every month, about a third of the company's 50,000 borrowers require some form of telephone inquiry about their loan payments, said George R. Kouri, president and chief executive officer of The Finance Co. and its Norfolk-based parent, TFC Enterprises Inc.
``This type of customer requires a lot of heavy servicing,'' Kouri said.
That's because TFC specializes in making used-car loans to two groups of high-risk borrowers: individuals whose credit records have been tarnished by bankruptcies or other financial difficulties and young enlisted military personnel who have no credit histories.
These are borrowers that most banks, thrifts and credit unions have shunned. But a dozen or so companies, including TFC Enterprises, have emerged as a force in lending to auto buyers with sour credit records.
``The primary reason is the consolidation that's going on,'' said David C. Stumpf, an analyst with the Richmond-based securities firm Wheat First Butcher Singer.
``This is a $30 billion to $50 billion market, and a lot of it is served by mom-and-pop companies that don't have the efficiencies of new technology or the lower cost of funds that bigger, better financed companies have.''
With only $178 million in loans, TFC's share of the market for car loans to high-risk borrowers is tiny. Still, TFC's portfolio has nearly quadrupled from $50 million in loans 3 1/2 years ago.
Part of that growth has come from the packages of loans that TFC buys from used-car dealers. In recent weeks, a team at its Norfolk service center put the records of 1,364 loans recently purchased from a Texas car dealer into TFC's computer system.
In a nearby conference room, TFC officers have been poring over documents as the company prepares to bid on a package of 1,600 loans, worth $6.4 million, from another car dealer.
But TFC, like other used-car lenders, also has responded to the reduced availability of credit for some used-car buyers. Sluggish growth in personal income in some parts of the country, cutbacks in employment at scores of large corporations and the proliferation of personal bankruptcies have narrowed the borrowing options of many U.S. households.
TFC's typical civilian borrower is in his or her mid-30s. Often, the credit history has been tarnished by a personal bankruptcy or difficulty paying bills. ``We will look for a change in their circumstances that would indicate an ability to handle credit,'' Kouri said.
TFC's military borrower usually is a single enlisted man, about 21 years old, without a credit history.
For a typical 30-month auto loan of $6,000 to these borrowers, TFC usually charges an annual percentage rate of 22 to 23 percent. On some loans, the rate is lower. On others, it can climb to as high as 29 percent.
That compares with interest rates ranging from 8 percent to 14 percent for used-car loans from banks and credit unions in Hampton Roads. The disparity between the rates charged by auto-finance companies and those at conventional lenders has provoked criticism from some consumer advocacy groups.
David Rubinstein, executive director of the Virginia Poverty Law Center in Richmond, acknowledged that companies like TFC have filled a void left by banks, thrifts and credit unions.
But the percent of TFC loans written off as uncollectible - 12 percent during the first half of 1995 - is significantly higher than the charge-off rates for small-loan companies in Virginia, Rubinstein said.
``That tells me their interest rates are too high,'' he said. ``The primary reason why borrowers default is that their payments are too high relative to their income.''
Joseph R. Becka, TFC's vice president and chief marketing officer, said the company needs higher rates to cover the cost of monitoring those borrowers who are slow to pay and still earn an adequate return for its investors.
``We share with (consumer advocacy groups) our losses and what our servicing costs are,'' Kouri added. ``We're not ripping people off.''
TFC, he said, would prefer to keep a borrower repaying a loan, even at a reduced rate, to avoid repossessing an automobile. ``If we repossess, the loss to us is 70 percent.''
The business of making used-car loans to high-risk borrowers came under scrutiny in an Alabama courtroom last year. A jury awarded $50 million in punitive damages to a customer of Mercury Finance Co., the largest provider of used-car loans to risky borrowers.
The plaintiff contended that he was defrauded by Mercury when the Skokie, Ill.-based company bought his $4,500 loan. Mercury responded that it did nothing wrong, but in January it reached an out-of-court settlement with the borrower for something less than $2 million.
The possibility of facing suits like the one against Mercury prompted TFC to stop doing business in Alabama. ``It's very distracting, and we don't need it,'' Kouri said. ``There are other places to do business.''
TFC Enterprises is no stranger to adversity, including a near collapse. Kouri and TFC chairman Robert S. Raley Jr. were working for an auto-finance company in Northern Virginia when they left in 1977 to launch their own lending company.
They borrowed their funds from a large Chicago-based credit company at 5 percentage points above the prime lending rate. But rising interest rates in the late 1970s and early 1980s quickly consumed TFC's net interest income, the difference between its cost of funds and what it earned from its loans.
When the prime rate hit 21 percent in 1981, TFC had to pay 26 percent for its money. But in Virginia, it could charge no more than 24 percent because of a state-imposed ceiling on consumer loan rates. That cap on small-loan rates was later removed.
TFC survived the rate squeeze by selling cars. In 1979, Kouri and Raley opened their first used-car lot, dubbed ``The Motorpool,'' in Alexandria, near Fort Belvoir. In 1980, they opened another car lot on Little Creek Road in Norfolk.
``As soon as interest rates came down, we closed this business,'' Kouri said. ``But it was a blessing in disguise because we learned a tremendous amount about being a used-car dealer.''
TFC eventually found less costly credit from other sources, including General Electric Capital and NationsBank. ``Our average cost of funds for all our borrowing during the second quarter was 8.5 percent,'' which was less than the current prime rate of 8.75 percent, said Charles M. Johnston, TFC's treasurer and chief financial officer.
TFC encountered another difficult period in 1990 and 1991 when a large pool of prospective customers - young enlisted personnel - left Hampton Roads for the Persian Gulf War.
The abrupt decline in a crucial part of its business prompted TFC to step up its pursuit of civilian borrowers. Loans to enlisted personnel, which once accounted for the bulk of TFC's portfolio, have been reduced to 30 percent.
TFC's recent expansion has been fueled partly by a 1993 initial public offering of stock, which provided $43 million of fresh capital. The new funds strengthened TFC's balance sheet and enabled the company to borrow money on more favorable terms.
Having its shares publicly traded also provided TFC with greater visibility among used-car dealers. ``Dealers saw that we could grow and could meet their financing needs,'' Kouri said.
But being a public company hasn't been trouble-free. TFC's stock price plunged 29 percent in a single day last February despite the company's report of substantially higher earnings for the fourth quarter of 1994 and the full year. TFC apparently had failed to meet investors' expectations of fourth-quarter earnings.
TFC's shares, which were sold in the public offering at $11.50, eventually recovered the ground they lost. However, TFC's stock still trades at a lower multiple of earnings than several of its peers. On Friday, the stock closed on the NASDAQ National Market System at $13.50.
Despite investor skittishness about TFC's earnings, the investment community has forecast continued growth in lending and earnings for the company.
Since mid-1992, TFC and 16 other auto-finance companies have been able to raise $351 million in the stock market, including $140 million during the first five months of this year, the brokerage firm Montgomery Securities noted in a recent report.
This infusion of capital could stimulate stiffer competition for used-car loans as companies attempt to put their additional funds to work. Some companies, especially younger ones, might not price their loans to reflect the risk of their borrowers defaulting. And that could bring a shakeout among these lenders, predicted Stumpf, the Wheat First analyst. ``Down the road, the business has got to get more competitive,'' he said.
TFC's Kouri expressed confidence that his company has the experience and discipline to control its loan losses. But the company has embarked on an aggressive expansion program, which calls for doing business nationwide.
After moving into Texas in the early 1990s, TFC began buying auto loans in the San Diego area in mid-1994 and opened a loan-production office in San Diego in July.
To accommodate some of the additional business, TFC moved its headquarters and mid-Atlantic service center in May from another Norfolk office building to 26,000 square feet of space in an office complex on Robin Hood Road. Next door, an additional 10,000 square feet is available.
TFC employs 150 at the Norfolk office and 290 at five other facilities, including regional service centers in Jacksonville, Fla., and Dallas.
To speed up the lending process and to monitor those loans already on its books, TFC has turned to more advanced technology. This fall, the company will install a computerized credit-scoring system that will cut the approval time for a loan application from three hours to 30 minutes or less, Kouri said. ILLUSTRATION: [Cover]
RISKY BUSINESS
[Color Photo]
MARTIN SMITH-RODDEN/Staff
[Color Photos]
MARTIN SMITH-RODDEN/Staff
TFC's rates are higher, said Joseph Becka, vice president and chief
marketing officer, left, because its borrowers require more
attention to keep them from defaulting. President George R. Kouri,
right, added, "If we repossess, the loss to us is 70 percent."
MARK MITCHELL/Staff
Kimberly Harris tries to reach a borrower who has missed a loan
payment at The Finance COmpany's regional service center in Norfolk.
About a third of the company's 50,000 borrowers need some kind of
telephone inquiry each month.
TFC Enterprises, Inc.
Headquarters: Norfolk
Year organized: 1977
Assets: $208.81 million (June 30)
Shareholders' equity: $46.63 million (June 30)
Number of shares: 11.28 million
Shareholders: 2,500
Employees: 440, including 150 in Norfolk
President and chief executive officer: George R. Kouri
Graphic
Research by TOM SHEAN, graphic by ROBERT D. VOROS/Staff
SOURCES: TFC Enterprises Inc.; NASDAQ National Market System.
by CNB