Ford found benefits in subprime loans

City Councilman Jerry Heimlicher was making subprime loans before most people knew what the term meant, but he was making them on cars and trucks made by Ford Motor Co. rather than home mortgages now at the heart of the credit crisis.

Heimlicher spent six years as president of Fairlane Credit LLC, a Ford Motor Credit Co. subsidiary started as an five-year experiment to determine whether Ford could profitably loan money to customers with credit problems. Based in Colorado Springs, the unit employed 650 and made $2.5 billion in loans before it was merged into Ford Credit in 2002 because company officials didn't believe it needed to operate as a separate subsidiary to make such loans.

Before he became president of Fairlane, Heimlicher was president of Ford Credit's insurance operations, which handled life and disability coverage for the company's borrowers, and property insurance coverage for Ford dealers' vehicle inventories. During his 38-year career with Ford Credit, he also served as a regional manager for the western and southeastern U.S. and worked in collections in Louisiana and Tennessee. He retired in 2002.

Ford Credit is the financing arm of No. 3 U.S. automaker Ford Motor Co., making loans to consumers to buy Ford vehicles. The company operates a customer service call center in the Interquest business park that employs 600.

Heimlicher was first elected in 2003 to the council for a partial term representing a district in southwest Colorado Springs; he was re-elected in 2005 and plans to seek re-election in April.

Question: How did Fairlane Credit get started?

Answer: In 1997, one in five adults had bad credit, which meant either a repossession, foreclosure or a huge amount of debt they could not service. If one in five people couldn't get a loan from us, that is a sizeable amount of customers we couldn't serve. We wanted to take the best of the worst and find a way to make loans to them. We were looking for good people with bad credit.

Q: What did your market research show?

A: We researched the business for a year to determine whether we should get into the business (of subprime lending). One thing we determined is that we shouldn't mix the standard type of lending done by Ford Credit with subprime lending because the approval process for standard (prime) loans was so automated - the computer just looked at the borrower's credit score and made a decision without any human interaction. All of the decisions on loans made by Fairlane were made by humans after spending 30 minutes to two hours with them. We also wanted to find out whether these borrowers would have loyalty to Ford if we helped to get them into a car. Our focus groups found that 70 percent said they would continue to buy Ford products even after they cleaned up their credit.

Q: What type of borrowers were you targeting?

A: We wanted to determine what kind of people with bad credit we could make loans to. We found that most people with bad credit were college graduates who took credit card offers and ran up so much debt they couldn't make enough to pay the rent, utilities, and living expenses and still pay off their credit card balances. They made one mistake, but they had a job and income to repay a car loan. We also found we could lend to another group of people with bad credit that had huge medical bills and inadequate insurance coverage and a third group who lost their jobs and lived off credit cards before they found another job. In cases like these, we looked at why the borrowers had a low credit score and made a lending decision on that basis.

Q: What are some differences between subprime lending on cars and subprime mortgage lending?

A: Most subprime mortgages were made with an interest rate that adjusted according to a benchmark, assuming that the value of the home would appreciate. We determined we couldn't make variable rate loans on cars because they are a depreciating asset. Instead we set the rate on our loans at 12-15 percent for the first two years, but we agreed to drop the rate to 7 percent if you pay on time for those 24 months. It rewarded on-time payments and gives the borrower a chance to rehabilitate their credit.

Q: How did Ford Credit measure success for Fairlane?

A: One of the reasons we were based in Colorado Springs instead of Detroit was we didn't want pressure to make loans we shouldn't have made. If we were successful, we would help Ford sell more cars. We were rewarded for loans that paid, unlike subprime mortgage lenders who were rewarded solely on volume. Our success was measured by loss and repossession ratios and profitability. We had no volume or dollar objectives.

Q: What was the biggest mistake subprime mortgage lenders made?

A: Mortgage lenders loaned up to 100 percent of the value of the property; we required a down payment or money down so the borrower had some equity in the vehicle. I'm glad we didn't do no-money-down lending. If the borrower had no money in the deal, why would they care about losing it? We also insisted that any manufacturer rebates be applied to the down payment. I'll never understand why (subprime mortgage lenders) got into it. They had to know that the day of reckoning would eventually come. Why would you make a loan for more than you could recover if it went bad? It all boils down to balancing the risk of the borrower's ability to repay with the security of the collateral backing the loan.

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Contact the writer: 636-0234 or wayneh@gazette.com

Questions and answers are edited for space and clarity.