Pandemic is Changing the Lending Landscape

All recessions are different, and the covid-19 pandemic downturn is no exception. But in every recession, some things remain the same: Banks reassess terms and lending criteria to mitigate risk, and they do so based on the unique situation, as well as by drawing on lessons from past downturns.

Those reassessments are what banks are doing now. The actions they’re taking as a result are going to affect the boating industry, and consumers seeking loans to buy boats, in ways that are likely to be at least a little different than what happened during the Great Recession.

“Last time, it was a banking and housing crisis, rather than a covid crisis,” says Bruce Van Wagoner, president of Wells Fargo Commercial Distribution Finance’s marine group. “That built up over time, versus something that happened over a short time. You could not prepare enough for something like this.”

For example, after the Great Recession, some lenders acted quickly on foreclosures and repossessions. That action wound up becoming a problem for consumers, business owners and even banks that found themselves the unfortunate owners of houses, cars, RVs and boats selling for pennies on the dollar. Lenders such as KeyBank and Textron Financial — once major marine floorplan credit line sources — abruptly pulled out, essentially leaving only Wells Fargo (then GE Capital’s Commercial Distribution Finance division) as the industry’s primary indirect lender.

Because of the unique nature of a pandemic that essentially halts global commerce — and because nobody knows how long workers and consumers will be paused or required to socially distance — banks took different immediate action and will constantly reassess long-term lending and spending. What the banks are doing means consumers and business owners can expect a somewhat fluid lending situation for the foreseeable future.

But for most banks, a “recession plan” means dealers can say goodbye to long advances, people buried in trades with payoffs, and minimal cash down.

Entering Healthier

Many banks, businesses and consumers that suffered in the Great Recession vowed that the lessons learned would forever alter their outlook. It’s those changes in practices that could help offset negative impacts from the pandemic.

“We’re entering this with a better housing picture than before,” Van Wagoner says. “The banks are stronger, the rates are lower, OEMs are stronger than they were going in the last time, and the channel of product in the field is much healthier.”

The combination of those things makes lenders optimistic, but with a caveat. “It just depends on how quickly we can get people back to work safely,” Van Wagoner says. “It depends on the length obviously, but even during the worst of things, during April, we still had dealers selling a fair amount of product. So it wasn’t like we just came to a standstill. We view this as short and steep.”

In early May, some states were hastily reopening, but more covid-19 outbreaks in those areas caused many experts to think social-distancing measures would be reinstated. “A lot of the issue today is, different states are handling this in different ways,” Van Wagoner says. “Dealers are having to dig deep and figure out how to work within state laws and still sell boats. We’re feeling like most states are being more cooperative and allowing boating. The restrictions are still ones people can work around.”

Immediate Effects

Wells Fargo acted quickly when the pandemic forced many business closures. It deferred the collection of curtailments for dealers during April and May. “By taking that step, it allows our dealers to maintain some working capital,” Van Wagoner says. “The hope is they use that capital to sell the inventory so they never have to make curtailments.”

Consumer lenders began to see major effects of covid-19 during the second week of March, when large banks generally reported a 40 percent decline in through-the-door lending applications, says Jim Coburn, managing partner of Coburn & Associates and past president of the National Marine Lenders Association.

By April 1, applications at most banks were down 60 percent, and slightly more in some cases, Coburn says. Most banks and service companies experiencing brisk loan traffic are reporting fewer new-boat deals and more preowned boats, as well as lower dollar volumes being financed, he says.

During the early months of the crisis, banks couldn’t liquidate boats from retailers or consumers even if they’d wanted to, says Jared Zimlin, business development director at Elite Recreational Finance, a service company that helps dealers with finance and insurance. “The auctions have closed,” Zimlin says. “There’s no place for repos to go. It’s hard to gauge unemployment. It really is a unique scenario; it’s not the same as a slow downturn.”

Some banks have redeployed staff from marine and RV departments to help process Small Business Administration loans that were part of the CARES Act, Coburn says. Many bank employees began working remotely in mid-March.

“A lot of those changes are happening with each lender,” Zimlin says, adding that if dealers understand that banks are requiring higher credit scores, bigger down payments and higher interest rates, they can prepare customers who have heard about record-low Fed rates or who expect terms similar to those last year — deals that may not actually exist.

Increasing Requirements

As banks learned in the last recession, loans on recreational items such as boats are often the first that consumers stop paying when times get hard. As a result, lenders are taking extra steps to verify employment. Some are calling human resources departments; others are requiring tax returns for a few years, even for an applicant with a high credit score and income, says Jimmy Delegro, president of Elite Recreational Finance.

It’s critical for dealers to do as much verification as possible, including pulling credit scores, something several marine dealers say they’re not doing. “You’ve got to make sure you’re able to properly pull and read credit scores,” Delegro says. “I know that’s two different things, but you can’t be flying blind.”

Understanding loan-to-value ratios based on credit reports, and understanding that banks are in their recession plans, is critical to closing deals, Delegro says, adding, “Cash equity is going to be king in this situation.”

Some lenders have drastically reduced the loan sizes that require signed and freshly dated personal financial statements, Coburn says. One bank that only mandated such statements on loans of $100,000 or higher now requires them for all loans; another dropped the requirement from $100,000 to $15,000. “Those are eye-opening examples,” he says.

Several banks are limiting out-of-state loans or limiting originations in certain U.S. regions, and many are requiring 20 percent down instead of 10 percent, Coburn says. Most banks have already revised how they classify credit scores and rates they offer on each tier, which means they’ve also eliminated programs for certain tiers and have changed ideal debt-to-income ratios.

“Banks are freaking out because they can’t really predict what will happen,” Coburn says. “Someone with a well-paying job and a great track record of timely bill payments could lose all income at any time. “Banks think about that because of the last recession. It’s fresh in their minds.”

Sign on the Virtual Dotted Line

In 2000, a bill was passed to allow e-signatures on bank documents, including loan documents, Coburn says. But use of the e-signature been slow to catch on, particularly in consumer lending. More car dealers than boat dealers are equipped to handle e-signatures. Car loans are typically for less than $50,000, while boat loans are typically for more.

“When you look at the negative side of this, dealers aren’t ready for virtual lending, and most banks don’t do full, 100 percent e-signatures on loan documents,” Coburn says. “They’re not ready. Covid or not, e- signatures are a sign of our times right now, and some people adapted to it faster than others. As time goes on, this is the way business is going to be done, 100 percent, period.”

Coburn is working with the Marine Retailers Association of the Americas to find out how many dealers have lenders that will accept electronic signatures. Preliminary results from a survey of 135 retailers showed that 12 percent had one lender that accepted e-signatures, 35 percent had zero, and 36 percent were unsure, according to MRAA president Matt Gruhn.

Conducting the loan process virtually will come with some additional hurdles, Delegro says. “From a technology standpoint, anyone can do document signing and storage online, but what dealers have to look at is the cost associated with this,” he says. “It’s not necessarily just buying Adobe. It’s about who’s storing, who vaults it, and who’s buying cloud space.”

Moving to the cloud can be a big change for dealers who have traditionally used file rooms with locks and keys, Zimlin says. Even if a dealer has a lender that accepts electronic signatures, the dealers must check their master agreements with lending reps to see if in-person signings are stipulated. Many agreements require dealers to be on the premises, and changing such agreements requires lawyers and time, Delegro says.

Still, Coburn predicts the costs to virtually protect and store information will ultimately pay off, especially if virus cases spike again in the fall and winter. “The big asterisk is if a second wave occurs,” he says. “That’s why e-signatures are so important.”

Moving Inventory

Interest in boating has remained strong throughout the pandemic, with traffic on dealer websites up substantially, Coburn says. Newly reopened ramps in Florida were the subject of numerous social media posts as lines stretched for miles and people waited for hours to launch their boats.

“Frankly, in my view, the marine industry’s got a lot of positives coming out of this if we can learn how to address concerns of state with social distancing,” Van Wagoner says. “The fact is, this may lead to more boating. People are not going to be running out on cruises and going on European vacations and even participating in travel sports.”

Even among dealers clustered in the same area, or in regions on lockdown, Elite was seeing some continue to submit loan applications. Others went almost completely silent, Zimlin says.

“I guess if there’s a message I would give to dealers it’s to take this opportunity to clear out their inventory,” Van Wagoner says. “Manufacturers are mostly going to be building presold boats at reduced production levels. If dealers take advantage of this, they may come out of this even more healthy.”

Results are likely to differ for various dealers, the experts say. “Some dealers will sell enough that they’ll run low on inventory, and with manufacturers having shut down for a while, there will be a gap in production,” Gruhn says. “At the same time, there will be dealers not selling boats well, and they’ll be overstocked.”

Dealers struggling to move inventory can, however, use the situation as a negotiation tool, Van Wagoner says. “If someone wants a boat in blue instead of the red one he’s got, the dealer can say, ‘Well, manufacturers were shut down,’ ” Van Wagoner says. “They can be honest and say they don’t know when they’ll get a new boat.”