Where Credit is Due

Very few exterior contracting companies are as savvy about offering home improvement finance as American Siding & Windows, Urbandale, Iowa. The $18 million company conducts 75 percent of its business via loans and sees finance as a critical tool for growth, particularly in this softer economic environment. The sub-prime mortgage fallout, along with possible risks of a recession, however, have spurred many lenders to examine their loans with greater scrutiny. Not surprisingly, there have been tweaks to terms and conditions of unsecured loans, and the number of finance companies willing to make secured loans has declined. American Siding’s co-owner Pat Pagano and finance manager Dennis Bracewell offer their outlook.

QR: Are you seeing reductions in loan limits along with changes to other terms and conditions?

Pagano: The answer is yes. Banks are becoming a lot more careful whom they lend to. The biggest example was that banks and financing companies were offering secured financing and now they are just into unsecured loans. That is obviously a huge difference right there. Some of the banks are not going as long as 240 months for a term. Previously, many banks, especially for unsecured loans, would offer 240 months. The other issue is that one popular way to get your loans approved — particularly if the homeowner had good credit — is to use “stated income” loans. This means the income that the homeowner told you, even though they did not verify it, was enough for the approval because their credit score was so high. In the mortgage industry — not in our industry — they call those “liar loans.” A lot of banks have gotten away from these stated income programs because they have gotten hurt by it.

Another sign that they’ve tightened their belts is a lot of them are requiring more stipulations or verifications before they fund a loan. Some financing companies that were taking borrowers with the worst credit, their “discount,” which means their “chop,” or what they charged us, has gone up quite a bit. There are a number of companies that have offered sub-prime financing in our industry. And these players over the past six to nine months have raised their discount from 17 percent to 20 percent and now 27.5 percent. And that means if they approve this loan, they are charging you, the contractor, 27.5 percent of the sale price of the project to take it. And the reason why their discount or their fee has gone up, is because, obviously, there is a lot of bad debt out there. So, it has affected everybody, from the financial companies and banks that deal with people with very good credit, to the sub-prime chop houses that don’t deal with good credit.

Bracewell: It is getting tougher. There are banks getting out of the secured business. Major players in the industry have changed their programs and it is getting tough.

Pagano: We really thought that when one of the major players got out of the secured business there would be others ready to fill the void. But it has not happened. It is noticeable.

Bracewell: You are really not seeing a lot of secured lenders going over 100 percent loan-to-value. They used to love going 125 percent loan-to-value all day long.

Pagano: They would give out what are called “no equity” loans to people who had just moved into a home who obviously had no equity there, but who had decent credit. In those cases, they would still loan 125 percent of the value. Now it has to be a minimum of 100 percent loan-to-value.

Bracewell: A lot of banks would add back our work into the job, but now they don’t.

QR: Are there problems right now, in this environment with higher FICO score requirements and tougher credit conditions?

Pagano: What we’ve seen recently is that more financing companies are getting into just the unsecured types of loans, vs. the secured type of loans where real estate backs the loan. The problem with the unsecured as opposed to offering the secured is that credit scores need to be higher. That is a challenge. More banks are shying away from those customers with even average credit. Forget bad credit. When all that they are offering is unsecured, some of those people that have a 600, 620 or a 640 FICO score are not going to get approved. So, a limited number of types of programs can definitely be a challenge.

Over the last five years, approximately 75 percent of our business was financed. During this period, especially recently, we have seen credit scores get collectively a bit worse. At the same time, we have seen debt-to-income, which is the homeowner’s debt load, also grow.

QR: That being the case, does it behoove exterior contractors to work with a number of different financing companies?

Bracewell: It never hurts to have options. You want the most options that you can get. There are people that qualify at Bank A that won’t qualify at Bank B. So, the more options the better.

Pagano: What we always try to look for when we look at banks are points of differentiation. We want something different than what is maybe being offered overall in the industry. So, if there is a certain bank that has a really good niche, we’ll want to use them to help us. Maybe there is a bank out there that does a better job of giving a good discount, which means a cost to us of offering 12 months’ same-as-cash. Maybe there is a bank where, for unsecured loans five years and under, interest rates are a lot better. Certain banks, perhaps you can get a higher loan amount. Certain banks, maybe you can get 180-month terms as opposed to the typical 120- or 144-month loans that are normally offered on unsecured. That is what we are trying to look for, what I would refer to as niche banking — certain financial institutions that may serve a niche better.

QR: Do your salespeople know what to do in all of the different circumstances?

Pagano: Training is a huge part of it. The one role that we don’t want the salespeople to play in the home is banker. There is so much information involved and there are so many potential pitfalls, you can end up really hurting yourself if you don’t know how to talk to the people intelligently about finance. So, what we do when we are in the home is quote a payment within about five dollars of where that payment is going to be. The salespeople are given guidelines and they have formulas based on the selling price. Their job is to use the formula. Is the salesperson asking them what their credit score is? Is the salesperson telling them that they are going to qualify for an unsecured loan? Is the salesperson telling them what the interest rate is going to be? Absolutely not. The salesperson’s role in the home is to build the value of the product and to quote the payment to see if that payment is affordable. If there is any question they cannot answer, they should call Dennis and me; he can get questions answered and even pull credit to give people a clearer idea of rates and payment amounts.