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The smart buyer: A look at the lending climate

After the recession, consumers became accustomed to loan terms that were less favorable. Now marine lenders say the public’s tolerance is shifting to frustration over the “new normal” as the more stringent lending criteria linger.

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The problem is exacerbated by the historically high number of people who have bankruptcies, foreclosures, short sales and loan defaults, a fact that does not dilute the effect delinquencies have on credit ratings, says Don Parkhurst, senior vice president of marine and RV finance at SunTrust Bank. People who have improved their situation often believe those blemishes shouldn’t count so heavily against them. “A foreclosure, short sale or bankruptcy is just the kiss of death right now, except maybe for that subprime lender,” Parkhurst says. “So if you’ve got a blemish like that and you’re trying to borrow money on a bigger boat, it’s very difficult to find financing.”

Borrowers are frustrated when they realize that short sales are usually classified the same as foreclosures on credit reports, Parkhurst says. “For us, short sales are as risky as a foreclosure, and I think the person who’s not in finance doesn’t understand that,” he says. “But in a short sale, the bank has to take a loss on a partial amount of the sale. As a society, we haven’t ever had this big of a short-sale phenomenon out there.”

John Haymond of Medallion Bank says most of the bank’s boat loans are considered non-prime. Because of the risk involved, the loan rates at Medallion vary between 7.95 and 17.95 percent. The term subprime has a negative connotation because of the housing crisis, but it actually refers to FICO credit scores under 680; near-prime loans typically fall between 680 and 720, Haymond says.

“We do near-prime loans if they don’t qualify through traditional lenders,” he says. “They might have high scores but have a bankruptcy on their credit report. Some lenders won’t finance anyone who’s had a bankruptcy or foreclosure. We’ll buy those all day but only up to $50,000. Some want to get into a six-figure motor home or boat, but we can’t accommodate those.”

The near-prime buyer, who used to be called the marginal buyer, is typically in the 680 to 700 range, Parkhurst says. “That’s probably a pretty good customer in terms of liquidity and net worth,” he says. “There’s one nick that knocks it outside the box, one hiccup, but basically the loan is OK.”

Super-prime is a new category that refers to those with 800-plus FICO scores — “perfect credit, no blemish ever, tons of liquidity,” Parkhurst says.

Then there are the applicants with decent scores but perhaps a debt-to-income ratio that’s moving in the wrong direction. In the rare instances when they’re approved, those borrowers often don’t want to pay the high rates. “People don’t realize that our biggest loss comes from that no-man’s land,” Haymond says. “Those are the applicants [whose] debt-to-income ratio is getting worse, and we end up taking losses. We will buy that, but we do it at 9.95 or 14.95 percent.”

Those with 719 scores who are used to paying 4 or 5 percent loan rates “freak out” when they see the 14.9 percent that the bank approved, Haymond says. “They still have a credit score that allows them to qualify for credit,” he says, but they’re headed in the wrong direction.

Non-prime boat loans are a unique niche, says Scott Anderson, marketing vice president at Merrick Bank. “If things happen to get tough on the buyer, a boat becomes less of a priority than the necessities,” he says. “At the same time, if some people have had problems that put them behind but are good loan candidates, we will finance them. There are a lot of people like that in that smaller segment of the market.”

The loans that less-than-prime lenders do write are usually on boats $60,000 and below. Anything above is the true “no-man’s land” because the funding for that customer just isn’t available. “Nobody wants the risk. No subprime lender is going to go out on a limb for large-ticket amounts,” Haymond says.

Peggy Bodenreider, sales manager at Sterling Acceptance Corp., believes there is an opportunity for a lender or service company to enter into non-prime, higher-dollar boat loans. “We’re starting to see applications from people who’ve weathered the storm pretty well but may have had a short sale or even a foreclosure, so traditional lenders won’t touch it,” she says. “It’s definitely an issue.”

Jared Zimlin, business development director for Priority One Financial Services, says the size equation is simple: The larger the loan, the greater the risk.

“The lender is ultimately looking at those larger loans and saying, ‘What if we get this thing back?’ … Add that to, ‘What if we have 100 of those on the books?’ ” Zimlin says. “That’s quite a bit of exposure. If it’s a $60,000 boat and they put 10 percent down, that’s pretty safe.”

September 2013 issue