Lenders need to have “some skin in the game” when financing subprime customers in order to mitigate losses and boost yields, said Donal Hummer Jr., founder, president, and chief executive of ThunderRoad Financial.
“From my standpoint, equity is king,” Hummer told Powersports Finance. Requiring the subprime customer to have a “substantial down payment” is one of the best ways to ensure a good, strong performance, he added.
However, lenders also need to “work the basics” — such as character, capacity, and stability — when lending to subprime consumers in order to ensure a successful deal, he said.
Many subprime customers faced credit issues during the financial crisis, between 2007 and 2010, Hummer said. “Then, around 2013 they had recovered, but their credit has not. So you do the work, you check their references, you check their employment, and these could be very good, performing parts of the portfolio — and obviously you make some extra yield on it,” he said
Approximately 20% of ThunderRoad Financial’s overall portfolio is comprised of subprime or nonprime consumers, Hummer previously told Powersports Finance. The company operates in 30 states, and originated 5,717 loans as of January, up from 1,510 loans at the same time a year prior, according to a Morningstar report.
Hummer will speak on the “Keys to Successful Subprime Lending” panel at the upcoming PowerSports Finance 2016 conference. Hummer and his fellow panelists will discuss subprime risk, underwriting best practices, and how to avoid seasonal repossession challenges.
He will be joined on the panel by Ben Donnarumma, managing director at Ride Today Acceptance, David Goff, assistant vice president of marketing and powersports relations at Westlake Financial Services, and Peter Wasmer, founder, president and chief executive at Chrome Capital.