Lenders Beware: Floorplan Troubles Loom

Auto lenders have been taking it on the chin for months now, and it seems things will get worse before they get better.

So far, financiers have largely blamed their woes on high gas prices, a tough economy, and higher-than-expected residual losses. But in the next few months, troubles related to dealer floorplans will begin to surface.

Vehicle sales are on the skids, and slower turnaround on dealership lots makes it tougher for dealers to repay their inventory loans. Compounding the problem is the fact that some lenders — like GMAC, for one — plan to raise floorplan interest rates, which will put even more pressure on dealers’ repayment abilities.

So now, in addition to worrying about worsening consumer credit performance and soaring vehicle loss severity, lenders face an added dilemma: what to do about rising floorplan delinquency rates. Financiers will have to keep close tabs on their floorplan customers, particularly those whose sales volume relies heavily on leases. Lenders will certainly have to beef up their staffs to address dealer issues on a case-by-case basis, much the same way they’re doing for consumers facing financial difficulties. And despite those efforts, floorplan performance is bound to deteriorate.

It will be interesting to see how financiers tackle the issue. What are some methodologies that can be implemented? How severe will the performance issues be? Will lenders exit the space?