Reprinted from MANUFACTURED HOME MERCHANDISER

Few manufactured home retailers and manufacturers use captive financing for all of their credit customers, but this method can be a significant capital generator when properly implemented.

But along with increased sales and interest payments comes increased risks that must be considered. Since a disorganized credit department will be a cash drain, minimizing delinquencies and repossessions requires control of the loan portfolio.

Typically, retailers only do captive financing with customers who don't qualify for bank financing. These kinds of customers are the most likely to result in delinquencies and charge-offs. Loan origination policies and TRW screenings can only go so far in reducing problems.

What is the best way to organize captive financing? The two most common options are to have the work done by a service bureau or to service the loans through an in-house computer system. For the past few years, banks have been facing the in-house vs. service bureau debate. With the cost of computer technology going down, however, most banks are turning to computer software to service their loans.

In 1979, approximately 15 percent of the commercial banks in the country serviced loans on their own computer system. Ten years later, more than 50 percent perform their data processing in-house. In fact, many small banks use personal computer-based systems because a competent service bureau isn't available to them.

Choosing between in-house and service bureau administration of loan origination and servicing can be perplexing for retailers and manufacturers. The wrong choice can exact a heavy toll in time and dollars, and take years to rectify. Many factors influence the decision to bring servicing in-house, but the key factors ultimately will be cost and control.

Start-up costs are high for an in-house system. The question is, how long will it take until the software and hardware investment is fully amortized? If a new employee is needed just to run the system, the additional salary must be incorporated into the equation.

The other consideration is how much control is actually gained. Software that simply kicks out repossession notices after 30 days is inappropriate, because chances are 15 to 20 percent of bank-rejected borrowers will be slow payers. The software must be adaptable to work out payment schedules and also be able to handle different interest rates, zero down for 90 days, and other specialized loans.

With smaller clients, most service bureaus will batch-process their entire portfolio, which hardly provides the control necessary to reduce delinquencies.

Before committing to an automated system, consider the advantages and disadvantages associated with the decision.

Advantages of in-house system

Marketing tool: The information culled from a well-organized loan portfolio can provide meaningful information about the business and its customer base.

Customized services: "No payment for 90 days!" "Low interest charges!" "No down payment!" If a PC-based system cannot handle these different loans, retailers can't offer them. Consequently, prospects enticed by these offers will go elsewhere. Also, many lenders charge different interest rates to various customers, depending on associated risks. Most service bureaus cannot process a group of loans with different interest rates.

Independence: With an in-house computer system, no one else dictates how the loan portfolio is operated, allowing the retailer to distinguish itself from competitors who can only offer loans that the local service bureau will accommodate.

Disadvantages of in-house system

Increased staffing: If the system is too difficult to learn, data processing personnel may make critical mistakes or additional staff may be necessary if the system is not spent on other management needs.

Software/hardware surprises: Software demonstrations are designed to indicate the strengths of a system. But if they aren't applicable to the retailer's needs, the strengths are worthless. The software may also be incompatible with existing hardware.

Selecting the right system

The first step in the selection process is identifying the credit department's needs. Which problems must be resolved immediately, and which problems are manageable? Establishing priorities is essential, because a cure-all software program doesn't exist: the ideal program addresses the most urgent problems.

If possible, choose the software before the hardware, because finding a computer that is compatible with a specific software program is easier than finding a program that addresses the department's needs and is compatible with existing hardware. Selecting a state-of-the-art program to run on an outdated computer is unwise.

Finally, the software must be expandable, not only in the number of customers serviced but in the number of features offered. It should be compatible with loan origination software, and perhaps offer a version that works on a Local Area Network (LAN) or Wide Area Nework (WAN), since manufacturers typically offer captive financials to a number of retailers. A modular software program should be able to grow as needs change.

Obtaining a loan servicing system represents a significant investment for manufactured home merchandisers. While a computer is not an instant remedy, it can turn a captive financial program into a reliable cash generator.

Dynamic Interface Systems Corporation
5959 W. Century Blvd., Suite 1200
Los Angeles, CA 90045 USA
Tel: (310) 568-4567
Fax: (310) 568-0740
email: info@loanledger.com

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